Intervest Bancshares (IBCA) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X)        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDEDSeptember 30, 2013

or

(  )         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From            to            

Commission file number000-23377

INTERVEST BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	13-3699013
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

One Rockefeller Plaza, Suite 400

New York, New York 10020-2002

(Address of principal executive offices) (Zip Code)

(212) 218-2800

(Registrant’s telephone number, including area code)

Not Applicable

    (Former name, former address and former fiscal year, if changed since last report)    

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

YESXX   NO    .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YESXX   NO    .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer        Accelerated Filer      

Non-Accelerated FilerXX   (Do not check if a smaller reporting company)    Smaller Reporting Company      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

YES    NOXX.

Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of October 31, 2013, there were 21,917,823 shares of common stock, $1.00 par value per share, outstanding.

INTERVEST BANCSHARES CORPORATION AND SUBSIDIARY

September 30, 2013 FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2013 (Unaudited) and December 31, 2012		3
Condensed Consolidated Statements of Earnings (Unaudited) for the Quarters and Nine-Months Ended September 30, 2013 and 2012		4
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine-Months Ended September 30, 2013 and 2012		5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine-Months Ended September  30, 2013 and 2012		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Review by Independent Registered Public Accounting Firm		27
Report of Independent Registered Public Accounting Firm		28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures About Market Risk		52
Item 4. Controls and Procedures		52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		52
Item 1A. Risk Factors		53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 3. Defaults Upon Senior Securities		55
Item 4. Mine Safety Disclosures		55
Item 5. Other Information		55
Item 6. Exhibits		55
Signatures		55
Exhibit Index		56
Certifications		57-59

Private Securities Litigation Reform Act Safe Harbor Statement

Intervest Bancshares Corporation (“IBC”) is the parent company of Intervest National Bank (“INB”). References in this report to “we,” “us” and “our” refer to these entities on a consolidated basis, unless otherwise specified. We are making this statement in order to satisfy the “Safe Harbor” provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this report on Form 10-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Words such as “may,” “will,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “assume,” “indicate,” “continue,” “target,” “goal,” and similar words or expressions of the future are intended to identify forward-looking statements. Except for historical information, the matters discussed herein are subject to certain risks and uncertainties that may adversely affect our business, financial condition and results of operations. The following factors, among others, could cause actual results to differ materially from those set forth in forward looking statements: the regulatory agreement to which IBC is currently subject and any operating restrictions arising therefrom including availability of regulatory approvals or waivers; changes in economic conditions and real estate values both nationally and in our market areas; changes in our borrowing facilities, volume of loan originations and deposit flows; changes in the levels of our non-interest income and provisions for loan and real estate losses; changes in the composition and credit quality of our loan portfolio; legislative or regulatory changes, including increased expenses arising therefrom; changes in interest rates which may reduce our net interest margin and net interest income; increases in competition; technological changes which we may not be able to implement; changes in accounting or regulatory principles, policies or guidelines; changes in tax laws and our ability to utilize our deferred tax asset, including NOL and AMT carryforwards; and our ability to attract and retain key members of management. Reference is made to our filings with the Securities and Exchange Commission for further discussion of risks and uncertainties regarding our business. Historical results are not necessarily indicative of our future prospects. Our risk factors are disclosed in Item 1A of Part I of our Annual Report on Form 10-K and updated as needed in Item 1A of Part II of our reports on Form 10-Q. Forward looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise forward looking information, whether as a result of new, updated information, future events, or otherwise.

2

PART 1. FINANCIAL INFORMATION -ITEM 1. Financial Statements

Intervest Bancshares Corporation and Subsidiary

Condensed Consolidated Balance Sheets

($ in thousands, except par value)	At September 30, 2013				At December 31, 2012
ASSETS			(Unaudited)			(Audited)
Cash and due from banks		$	25,292		$	57,641
Federal funds sold and other short-term investments			4,961	��		2,754
Total cash and cash equivalents			30,253			60,395
Time deposits with banks			5,370			5,170
Securities available for sale(estimated fair value of $1,016 and $1,000, respectively)			1,016			1,000
Securities held to maturity(estimated fair value of $410,304 and $442,166, respectively)			416,321			443,777
Federal Reserve Bank and Federal Home Loan Bank stock, at cost			8,237			8,151
Loans receivable(net of allowance for loan losses of $26,777 and $28,103, respectively)			1,073,500			1,079,363
Accrued interest receivable			4,735			5,191
Loan fees receivable			2,511			3,108
Premises and equipment, net			4,129			3,878
Foreclosed real estate(net of valuation allowance of $2,123 and $5,339, respectively)			12,019			15,923
Deferred income tax asset			21,774			29,234
Other assets			4,374			10,602
Total assets		$	1,584,239		$	1,665,792
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts		$	5,138		$	5,130
Interest-bearing deposit accounts:
Checking (NOW) accounts			15,816			15,185
Savings accounts			9,670			9,601
Money market accounts			370,367			395,825
Certificate of deposit accounts			897,412			936,878
Total deposit accounts			1,298,403			1,362,619
Long-term debt - subordinated debentures (capital securities)			56,702			56,702
Accrued interest payable on long term debt			463			6,228
Accrued interest payable on deposits			1,398			2,379
Mortgage escrow funds payable			27,003			17,743
Official checks outstanding			5,224			7,003
Other liabilities			2,758			2,171
Total liabilities			1,391,951			1,454,845
STOCKHOLDERS’ EQUITY
Preferred stock($1.00 par value; 300,000 shares authorized; 25,000 shares issued and outstanding at December 31, 2012)			-			25
Additional paid-in-capital, preferred			-			24,975
Preferred stock discount			-			(376)
Common stock($1.00 par value; 62,000,000 shares authorized; 21,916,623 and 21,589,589 shares issued and outstanding, respectively)			21,917			21,590
Additional paid-in-capital, common			87,066			85,726
Unearned compensation on restricted common stock awards			(1,447	)		(715)
Retained earnings			84,752			79,722
Total stockholders’ equity			192,288			210,947
Total liabilities and stockholders’ equity		$	1,584,239		$	1,665,792

See accompanying notes to condensed consolidated financial statements.

3

Intervest Bancshares Corporation and Subsidiary

Condensed Consolidated Statements of Earnings

(Unaudited)

	Quarter Ended     September 30,					Nine-Months Ended September 30,
($ in thousands, except per share data)		2013		2012		2013		2012
INTEREST AND DIVIDEND INCOME
Loans receivable			$14,486		$17,351		$44,230		$53,202
Securities			1,121		1,719		3,213		6,255
Other interest-earning assets			17		12		53		29
Total interest and dividend income			15,624		19,082		47,496		59,486
INTEREST EXPENSE
Deposits			6,392		8,654		19,810		28,214
Subordinated debentures - capital securities			402		466		1,277		1,392
FHLB advances and all other borrowed funds			-		103		-		358
Total interest expense			6,794		9,223		21,087		29,964
Net interest and dividend income			8,830		9,859		26,409		29,522
Provision (credit) for loan losses			250		-		(1,500)		-
Net interest and dividend income after provision (credit) for loan losses			8,580		9,859		27,909		29,522
NONINTEREST INCOME
Income from the early repayment of mortgage loans			619		765		1,909		2,730
Income from mortgage lending activities			455		332		1,112		793
Customer service fees			100		90		289		352
Impairment writedowns on investment securities			(273)		-		(964)		(157)
Total noninterest income			901		1,187		2,346		3,718
NONINTEREST EXPENSES
Salaries and employee benefits			2,081		2,122		6,394		6,271
Occupancy and equipment, net			554		523		1,632		1,566
Data processing			97		83		271		284
Professional fees and services			327		370		1,095		1,129
Stationery, printing, supplies, postage and delivery			61		78		207		200
FDIC insurance			318		581		1,129		1,816
General insurance			153		143		455		433
Director and committee fees			85		103		272		317
Advertising and promotion			7		5		17		12
Real estate activities expense (income), net			212		883		(1,120)		1,822
Provision for real estate losses			250		1,025		955		2,933
All other			179		152		482		445
Total noninterest expenses			4,324		6,068		11,789		17,228
Earnings before provision for income taxes			5,157		4,978		18,466		16,012
Provision for income taxes			2,300		2,300		8,179		7,320
Net earnings			2,857		2,678		10,287		8,692
Preferred stock dividend requirements and discount amortization			(269)		(453)		(1,057)		(1,345)
Net earnings available to common stockholders		$	2,588	$	2,225	$	9,230	$	7,347
Basic earnings per common share		$	0.12	$	0.10	$	0.42	$	0.34
Diluted earnings per common share		$	0.12	$	0.10	$	0.42	$	0.34
Cash dividends per common share		$	-	$	-	$	-	$	-

  See accompanying notes to condensed consolidated financial statements.

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Intervest Bancshares Corporation and Subsidiary

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	Nine-Months Ended September 30,
	2013				2012
($ in thousands)	Shares		Amount		Shares		Amount
PREFERRED STOCK
Balance at beginning of period		25,000	$	25		25,000	$	25
Redemption of preferred stock		(25,000)		(25)		-		-
Balance at end of period		-		-		25,000		25
ADDITIONAL PAID-IN-CAPITAL, PREFERRED
Balance at beginning of period				24,975				24,975
Redemption of preferred stock				(24,975)				-
Balance at end of period				-				24,975
PREFERRED STOCK DISCOUNT
Balance at beginning of period				(376)				(762)
Amortization of preferred stock discount				376				290
Balance at end of period				-				(472)
COMMON STOCK
Balance at beginning of period		21,589,589		21,590		21,125,289		21,125
Issuance of 330,700 and 465,400 shares of restricted stock		330,700		331		465,400		466
Issuance of 14,967 and 100 shares upon exercise of stock options		14,967		15		100		-
Forfeiture of 18,633 and 1,200 shares of restricted stock		(18,633)		(19)		(1,200)		(1)
Balance at end of period		21,916,623		21,917		21,589,589		21,590
ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period				85,726				84,765
Issuance of 330,700 and 465,400 shares of restricted stock				1,157				884
Issuance of 14,967 and 100 shares upon exercise of stock options				39				-
Forfeiture of 18,633 and 1,200 shares of restricted stock				(40)				(2)
Excess income tax benefit from vesting of restricted stock				150				-
Compensation expense related to grants of stock options				34				61
Balance at end of period				87,066				85,708
UNEARNED COMPENSATION - RESTRICTED STOCK
Balance at beginning of period				(715)				(483)
Issuance of 330,700 and 465,400 shares of restricted stock				(1,488)				(1,350)
Amortization of unearned compensation to compensation expense				756				827
Balance at end of period				(1,447)				(1,006)
RETAINED EARNINGS
Balance at beginning of period				79,722				67,886
Net earnings				10,287				8,692
Cash dividend declared and paid on preferred stock				(5,068)				-
Discount from redemption of preferred stock				187				-
Preferred stock discount amortization				(376)				(290)
Balance at end of period				84,752				76,288
Total stockholders’ equity at end of period		21,916,623	$	192,288		21,614,589	$	207,108
Preferred stockholder’s equity		-		-		25,000	$	24,528
Common stockholders’ equity		21,916,623		192,288		21,589,589		182,580
Total stockholders’ equity at end of period		21,916,623	$	192,288		21,614,589	$	207,108

  See accompanying notes to condensed consolidated financial statements.

5

Intervest Bancshares Corporation and Subsidiary

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine-Months Ended September 30,
($ in thousands)	2013			2012
OPERATING ACTIVITIES
Net earnings		$10,287			$ 8,692
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		258			260
(Credit) provisions for loan and real estate losses, net		(545	)		2,933
Deferred income tax expense		7,460			6,844
Compensation expense related to grants of common stock and options		731			885
Amortization of deferred debenture offering costs		28			28
Amortization of premiums (accretion) of discounts and deferred loan fees, net		610			299
Net gain on sales of foreclosed real estate		(820	)		-
Impairment writedowns on investment securities		964			157
Net (decrease) increase in accrued interest payable on debentures		(5,765	)		1,406
Net (decrease) increase in official checks outstanding		(1,779	)		5,385
Net decrease in loan fees receivable		597			755
Net change in all other assets and liabilities		7,716			1,842
Net cash provided by operating activities		19,742			29,486
INVESTING ACTIVITIES
Maturities and calls of securities held to maturity		99,705			501,870
Purchases of securities held to maturity		(75,051	)		(243,486)
Purchases of securities available for sale		(16	)		-
Purchases of interest-earning time deposits with banks		(200	)		(2,200)
(Purchases) redemptions of FRB and FHLB stock, net		(86	)		792
Repayments of loans receivable, net of originations		7,337			6,543
Proceeds from sales of foreclosed real estate		3,569			3,544
Purchases of premises and equipment, net		(509	)		(75)
Net cash provided by investing activities		34,749			266,988
FINANCING ACTIVITIES
Net decrease in deposits		(64,216	)		(229,815)
Net increase in mortgage escrow funds payable		9,260			8,246
Net decrease in FHLB advances - original terms of more than 3 months		-			(10,500)
Redemption of preferred stock		(24,813	)		-
Cash dividends paid to preferred stockholders		(5,068	)		-
Proceeds from issuance of common stock upon exercise of options		54			-
Excess tax benefit from exercise of options and vesting of restricted stock		150			-
Net cash used in financing activities		(84,633	)		(232,069)
Net (decrease) increase in cash and cash equivalents		(30,142	)		64,405
Cash and cash equivalents at beginning of period		60,395			29,863
Cash and cash equivalents at end of period		$ 30,253			$ 94,268
SUPPLEMENTAL DISCLOSURES
Cash paid for interest		$27,805			$30,264
Cash paid for income taxes		900			733
Loans transferred to foreclosed real estate		3,040			1,457
Loans originated to finance sales of foreclosed real estate		3,240			1,400
Preferred stock dividend requirements and amortization of related discount		1,057			1,345

See accompanying notes to condensed consolidated financial statements.

6

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 - Summary of Significant Accounting Policies

General

Intervest Bancshares Corporation (“IBC”) is the parent company of Intervest National Bank (“INB”). References in this report to “we,” “us” and “our” refer to these entities on a consolidated basis, unless otherwise specified. For a description of our business, see note 1 to the financial statements in our 2012 Annual Report on Form 10-K (“2012 10-K”). Our accounting and reporting policies conform to U.S. generally accepted accounting principles (GAAP) and general practices within the banking industry and are described in note 1 to the financial statements in our 2012 10-K, as updated by the information in this Form 10-Q.

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements (“financial statements”) in this report have not been audited except for information derived from our audited 2012 consolidated financial statements and notes thereto and should be read in conjunction with our 2012 10-K. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in this report pursuant to the rules and regulations of the Securities and Exchange Commission.

Use of Estimates

In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the date of the financial statements, and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change currently relate to the determination of our allowance for loan losses, valuation allowance for real estate losses, other than temporary impairment assessments of our security investments and the need for and amount of a valuation allowance for our deferred tax asset. These estimates involve a higher degree of complexity and subjectivity and may require assumptions about highly uncertain matters. Current market conditions increase the risk and complexity of the judgments in these estimates. In our opinion, all material adjustments necessary for a fair presentation of our financial condition and results of operations for the interim periods presented in this report have been made. These adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Our results of operations for the interim periods are not necessarily indicative of results that may be expected for the entire year or any other interim period.

Recent Accounting Standards Update

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (ASU) 2012-02,“Testing Indefinite-Lived Intangible Assets for Impairment,” which, among other things, gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. We adopted this ASU on January 1, 2013, and since we do not have intangible assets, it had no impact on our financial statements.

In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,”which limits the scope of the new balance sheet offsetting disclosures in ASU 2011-11 to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. We adopted this ASU on February 1, 2013 and it had no impact on our financial statements.

In February 2013, the FASB Issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires entities to present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. We adopted this ASU on March 1, 2013 and it had no impact on our financial statements.

In February 2013, the FASB Issued ASU No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date”. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for obligations within the scope of this ASU, which is effective January 1, 2014. Upon adoption, we do not expect this ASU to impact our financial statements.

7

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 - Summary of Significant Accounting Policies, Continued

Recent Accounting Standards Update, Continued

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which among other things, require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as denoted within the ASU. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the impact of ASU 2013-11 on our financial statements.

In July 2013, the FASB issued ASU No. 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes”. ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did have an impact on our financial statements.

Recent Regulatory Developments

Basel III Legislation

On July 2, 2013, the FRB approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by INB. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC’s rule is identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for INB on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. We are currently evaluating the provisions of the final rules and their expected impact on us.

8

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 2- Securities Held to Maturity and Available for Sale

The carrying value (amortized cost) and estimated fair value of securities held to maturity are as follows:

($ in thousands)	Number of Securities		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated   Fair   Value		Wtd-Avg Yield		Wtd-Avg Expected Life		Wtd-Avg   Remaining   Maturity
At September 30, 2013
U.S. government agencies (1)		176		$333,124	$	490	$	4,163	$	329,451		0.93%		2.9 Yrs		4.1 Yrs
Residential mortgage-backed (2)		56		80,061		225		640		79,646		1.97%		4.6 Yrs		15.0 Yrs
State and municipal		1		532		-		3		529		1.25%		3.5 Yrs		3.5 Yrs
Corporate (3)		8		2,604		-		1,926		678		2.00%		19.5 Yrs		20.2 Yrs
		241		$416,321	$	715	$	6,732	$	410,304		1.14%		3.3Yrs		6.3 Yrs
At December 31, 2012
U.S. government agencies (1)		165		$355,244	$	1,109	$	233	$	356,120		0.87%		1.6 Yrs		4.6 Yrs
Residential mortgage-backed (2)		48		84,279		651		72		84,858		1.76%		3.3 Yrs		17.3 Yrs
State and municipal		1		533		-		3		530		1.25%		4.2 Yrs		4.3 Yrs
Corporate (3)		8		3,721		-		3,063		658		2.11%		20.3 Yrs		20.9 Yrs
		222		$443,777	$	1,760	$	3,371	$	442,166		1.05%		2.0 Yrs		7.1 Yrs

(1) Consist of debt obligations of U.S. government sponsored agencies (GSEs) - Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), which are federally chartered corporations privately owned by shareholders. GSE securities carry no explicit U.S. government guarantee of creditworthiness. Neither principal nor interest payments are guaranteed by the U.S. government nor do they not constitute a debt or obligation of the U.S. government or any of its agencies or instrumentalities other than the applicable GSE. In September 2008, FNMA and FHLMC were placed under U.S. government conservatorship.

(2) At September 30, 2013, consisted of $14.5 million of Government National Mortgage Association (GNMA) pass-through certificates, $46.3 million of FNMA participation certificates and $19.3 million of FHLMC participation certificates. At December 31, 2012, consisted of $18.7 million of GNMA pass-through certificates, $40.0 million of FNMA participation certificates and $25.6 million of FHLMC participation certificates. The GNMA pass-through certificates are guaranteed as to the payment of principal and interest by the full faith and credit of the U.S. government while the FNMA and FHLMC certificates have an implied guarantee by such agency as to principal and interest payments.

(3) Consist of variable-rate pooled trust preferred securities backed by obligations of companies in the banking industry. Amortized cost at September 30, 2013 and December 31, 2012 is reported net of other than temporary impairment charges of $5.2 million and $4.2 million, respectively.

The estimated fair values of securities held to maturity with gross unrealized losses segregated between securities that have been in a continuous unrealized loss position for less than twelve months at the respective dates and those that have been in a continuous unrealized loss position for twelve months or longer are summarized as follows:

			Less Than Twelve Months				Twelve Months or Longer				Total
($ in thousands)	Number of Securities		Estimated Fair Value		Gross  Unrealized  Losses		Estimated Fair Value		Gross  Unrealized  Losses		Estimated Fair Value		Gross   Unrealized   Losses
At September 30, 2013
U.S. government agencies		137		$257,171		$4,163		$        -		$        -		$257,171		$4,163
Residential mortgage-backed		38		49,827		623		917		17		50,744		640
State and municipal		1		529		3		-		-		529		3
Corporate		8		-		-		678		1,926		678		1,926
		184		$307,527		$4,789		$1,595		$1,943		$309,122		$6,732
At December 31, 2012
U.S. government agencies		53		$129,365		$   233		$        -		$        -		$129,365		$   233
Residential mortgage-backed		14		24,481		72		-		-		24,481		72
State and municipal		1		530		3		-		-		530		3
Corporate		8		-		-		658		3,063		658		3,063
		76		$154,376		$   308		$   658		$3,063		$155,034		$3,371

Nearly all of the securities we own are investment grade and have either fixed interest rates or have predetermined scheduled interest rate increases and nearly all have call or prepayment features that allow the issuer to repay all or a portion of the security at par before its stated maturity without penalty. In general, as interest rates rise, the estimated fair value of fixed-rate securities will decrease; as interest rates fall, their value will increase. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience.

9

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 2 - Securities Held to Maturity and Available for Sale, Continued

INB, which holds the portfolio, has the ability and intent to hold all of these investments for a period of time sufficient for the estimated fair value of the securities with unrealized losses to recover, which may be at the time of maturity. Historically, INB has always recovered the cost of its investments in securities upon maturity. We view all the gross unrealized losses related to the agency, mortgaged-backed and state and municipal securities to be temporary for the reasons noted above. The estimated fair values disclosed in the preceding table for U.S. government agency, mortgage-backed and state and municipal securities are obtained from third-party brokers who provide quoted prices derived from active markets for identical or similar securities.

INB also owns trust preferred securities that are classified as held to maturity. The investments in these debt securities represent beneficial interests in securitized financial assets that have contractual cash flows. They consist of mezzanine-class, variable-rate (indexed to 3 month libor) pooled trust preferred securities backed by debt obligations of companies in the banking industry. At the time of purchase, these securities were investment grade rated. The current estimated fair values of these securities are depressed due to various reasons, including the weak economy, the financial condition of a large number of the issuing banks, a number of issuing banks that are no longer in business and restrictions that have been or can be placed on the payment of interest by regulatory agencies, all of which have severely reduced the demand for these securities and rendered their trading market inactive. There has been an adverse change in the estimated future cash flows from these securities due to the reasons cited above such that all of these securities have been other than temporarily impaired (OTTI) to varying degrees as denoted in the table that follows.

The following table provides various information regarding trust preferred securities.

($ in thousands)	Credit	Cost		Write Downs		Adj. Cost		Estimated Fair		Unrealized		% of Collateral				# of Banks	Discount (4)				PV of Expected
Cusip # (1)	Rating (1)	Basis		(2)		Basis		Value (3)		Loss		Defaulted		Deferred		in Pool	Margin		Rate		Cash Flows
At September 30, 2013
74041PAEO	C		$  998		$   (918)		$     80		$  29		$    (51)		43.20%		14.80%	39		1.92%		5.22%		$   338
74040XAD6	CC		995		(485)		510		176		(334)		17.20%		9.80%	54		1.64%		5.17%		978
74040XAE4	CC		973		(462)		511		176		(335)		17.20%		9.80%	54		1.85%		5.39%		953
74040XAE4	CC		973		(462)		511		176		(335)		17.20%		9.80%	54		1.85%		5.39%		953
74040YAF9	CC-		900		(767)		133		33		(100)		29.00%		5.90%	58		1.88%		5.32%		769
74040YAE2	CC-		919		(787)		132		33		(99)		29.00%		5.90%	58		1.70%		5.14%		785
74041UAE9	C+		1,021		(658)		363		27		(336)		8.00%		29.00%	64		1.36%		4.78%		725
74041UAE9	C+		1,022		(658)		364		28		(336)		8.00%		29.00%	64		1.39%		4.81%		724
			$7,801		$(5,197)		$2,604		$678		$(1,926)											$6,225
At December 31, 2012
74041PAEO	C		$  999		$   (797)		$   202		$  31		$    (171)		39.23%		13.76%	39		1.92%		4.04%		$   348
74040XAD6	C+		1,010		(316)		694		180		(514)		16.31%		9.19%	54		1.64%		3.97%		989
74040XAE4	C+		988		(294)		694		180		(514)		16.31%		9.19%	54		1.85%		4.18%		959
74040XAE4	C+		988		(294)		694		180		(514)		16.31%		9.19%	54		1.85%		4.18%		959
74040YAF9	C		952		(718)		234		32		(202)		27.24%		13.28%	58		1.88%		4.04%		642
74040YAE2	C		972		(737)		235		32		(203)		27.24%		13.28%	58		1.70%		3.86%		655
74041UAE9	C+		1,022		(539)		483		11		(472)		7.80%		31.17%	64		1.36%		3.61%		638
74041UAE9	C+		1,023		(538)		485		12		(473)		7.80%		31.17%	64		1.39%		3.64%		636
			$7,954		$(4,233)		$3,721		$658		$(3,063)											$5,826

(1) All of these securities were on cash basis accounting because INB is currently not receiving all scheduled contractual interest payments on these securities. A large portion of the contractual cash flows for the interest payments on these securities are being redirected to a more senior class of bondholders to pay down the principal balance on the more senior class faster. This occurs when deferral and default activity reduces the security’s underlying performing collateral to a level where a predetermined coverage test fails and requires cash flows from interest payments to be redirected to a senior class of security holders. If no additional deferrals or defaults occur, such test will eventually be met again through the redirection of the cash flow and cash interest payments would resume on INB’s bonds, although no assurance can be given as to the amount and timing of the resumption, if any. In the first nine months of 2013, INB received payments on cusips# 74040XAD6, 74040XAE4, 74040YAF9 and 74040YAE2 totaling approximately $153,000. The credit rating represents a composite rating derived from third party credit rating agencies (Moody’s and Fitch).

(2) Writedowns are derived based on analysis of various factors and consider the difference between the book value of the security and the projected present value of the security’s cash flows as indicated per an analysis performed using guidance prescribed by GAAP.

10

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 2 - Securities Held to Maturity and Available for Sale, Continued

Notes to the preceding table continued:

(3) Obtained from Moody’s pricing service, which uses a complex valuation model that factors in numerous assumptions and data, including anticipated discounts related to illiquid trading markets, credit and interest rate risk, which under GAAP would be considered Level 3 inputs. INB believes that the actual values that would be realized in an orderly market under normal credit conditions between a willing buyer and seller would approximate the projected present value (PV) of the securities’ cash flows and therefore, these estimated fair values are used for disclosure purposes only and are not used for calculating and recording impairment. INB also has the intent and the ability to retain these trust preferred securities until maturity and currently has no intention of selling them. We view the gross unrealized losses related to these securities to be temporary.

(4) In determining whether there is OTTI, INB relies on a cash flow analysis as prescribed under GAAP (ASC 320-10-35) and prepared by a third party specialist to determine whether conditions are such that the projected cash flows are insufficient to recover INB’s principal investment. The basic methodology under GAAP is to compare the present value of the cash flows that are derived from assumptions made with respect to deferrals, defaults and prepayments from quarter to quarter. A decline in the present value versus that for the previous quarter is considered to be an adverse change. The discount margin in the table above represents the incremental credit spread used to derive the discount rate for present value computations. Consistent with GAAP, we analyze the specific credit characteristics of the collateral underlying each individual security to develop the deferral/default assumptions for estimated cash flows. This analysis consists of examining available data regarding trends in earnings and capital and problem asset ratios of each bank in the collateral pool in order to estimate their capacity to continue principal and interest payments on the investments we own. In order to estimate the expected cash flows, we focused on each bank’s Texas ratio, which is defined as nonperforming assets plus 90 day past due loans divided by tangible equity plus loan loss reserves. We concluded that banks with Texas ratios of 75% or more may experience greater difficulties in making payments. Based on our judgment, we determined and used the following assumptions in projecting cash flows: for those banks that were in default, we assumed no cash flows, for those banks that had deferred payments, we assumed a 15% recovery after a 2 year lag, and for banks that were paying we assumed prepayments of 1% annually and 100% at maturity and annual defaults of 75 basis points. It should be noted that the results of any discounted cash flow analysis are significantly affected by variables such as the estimate of the probability of default, discount rates, prepayment rates and the creditworthiness of the underlying issuers. Therefore, changes in any of these assumptions could cause the results of our cash flow models and OTTI assessments to deviate and result in different conclusions.

The table below provides a cumulative roll forward of credit losses recognized on securities held to maturity for the periods indicated.

	Quarter Ended September 30,				Nine-Months Ended September 30,
($ in thousands)	2013		2012		2013		2012
Balance at beginning of period		$4,924		$3,808		$4,233		$3,651
Additional credit losses on debt securities for which OTTI was previously recognized		273		-		964		157
Balance at end of period		$5,197		$3,808		$5,197		$3,808

The following table is a summary of the carrying value (amortized cost) and fair value of securities held to maturity as of September 30, 2013, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. The amounts reported in the table below do not consider the effects of possible prepayments or unscheduled repayments of the securities held to maturity portfolio.

($ in thousands)	Amortized Cost		Estimated Fair Value		Wtd-Avg Yield
Due in one year or less		$  17,094		$    17,196		1.24%
Due after one year through five years		243,465		241,627		0.85
Due after five years through ten years		98,322		96,382		1.27
Due after ten years		57,440		55,099		2.09
		$416,321		$410,304		1.14%

At September 30, 2013 and December 31, 2012, the carrying value of securities available for sale amounted to approximately $1.0 million, which also approximated estimated fair value. The investment represented approximately 91,210 and 90,000 shares owned at September 30, 2013 and December 31, 2012, respectively, in an intermediate bond fund that holds securities that are deemed to be qualified under the Community Reinvestment Act.

11

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3 - Loans Receivable

Major classifications of loans receivable are summarized as follows:

	At September 30, 2013				At December 31, 2012
($ in thousands)	# of Loans		Amount		# of Loans		Amount
Loans Secured By Real Estate:
Commercial loans		383		$  817,572		376		$   852,213
Multifamily loans		139		210,508		142		208,699
One to four family loans		19		68,662		13		41,676
Land loans		4		5,881		7		7,167
		545		1,102,623		538		1,109,755
All Other Loans:
Business loans		19		1,130		18		949
Consumer loans		14		347		12		359
		33		1,477		30		1,308
Loans receivable, gross		578		1,104,100		568		1,111,063
Deferred loan fees				(3,823)				(3,597)
Loans receivable, net of deferred fees				1,100,277				1,107,466
Allowance for loan losses				(26,777)				(28,103)
Loans receivable, net				$1,073,500				$1,079,363

At September 30, 2013 and December 31, 2012, there were $39.5 million and $45.9 million of loans, respectively, on nonaccrual status, and $11.4 million and $20.1 million of loans, respectively, classified as accruing TDRs. These loans represented all of our impaired loans as of those dates.

At September 30, 2013, there were seven loans totaling $18.4 million, compared to two loans totaling $4.4 million at December 31, 2012, that were 90 days past due and still accruing interest. This category normally consists of loans that have matured and were in the process of being extended, and the borrowers were making monthly payments.

The recorded investment, corresponding specific impairment valuation allowance and unpaid principal balance of our impaired loans at the dates indicated are summarized follows:

	(1) Recorded Investment by State																(2) Specific Valuation Allowance		(3) Total Unpaid Principal		# of    Loans
($ in thousands)	NY		FL		NJ		GA		CT		OH		SD		Total
At September 30, 2013
Commercial real estate:
Retail	$	8,779	$	9,005	$	-	$	-	$	2,735	$	1,000	$	-	$	21,519		$1,661		$28,446		7
Office Building		-		15,242		-		8,695		-		-		-		23,937		1,977		24,451		3
Mixed Use		-		-		500		-		-		-		-		500		25		500		1
Multifamily		-		3,140		-		-		-		-		-		3,140		596		3,140		2
Land		-		-		-		-		-		-		1,802		1,802		498		1,802		1
Totals	$	8,779	$	27,387	$	500	$	8,695	$	2,735	$	1,000	$	1,802	$	50,898		$4,757		$58,339		14
At December 31, 2012
Commercial Real Estate
Retail	$	11,837	$	9,005	$	-	$	-	$	-	$	1,000	$	-	$	21,842		$1,966		$27,596		6
Office Building		-		17,988		883		-		-		-		-		18,871		583		19,621		3
Warehouse		950		-		-		-		-		-		-		950		28		950		1
Mixed Use		8,632		-		500		-		-		-		-		9,132		1,248		9,421		4
Multifamily		-		12,577		-		-		-		-		-		12,577		1,542		14,225		6
Land		515		-		-		-		-		-		2,086		2,601		521		2,601		3
Totals	$	21,934	$	39,570	$	1,383	$	-	$	-	$	1,000	$	2,086	$	65,973		$5,888		$74,414		23

(1) Represents contractual unpaid principal less any partial principal chargeoffs and interest received and applied as a reduction of principal.

(2) Represents a specific valuation allowance against the recorded investment included as part of the overall allowance for loan losses. All impaired loans at the dates indicated in the table had a specific valuation allowance.

(3) Represents contractual unpaid principal balance (shown for informational purposes only). The borrowers are obligated to pay such amounts, however the ultimate collection by us of such amounts in this column cannot be assured.

12

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3 - Loans Receivable, Continued

Other information related to our impaired loans is summarized as follows:

	Quarter Ended September 30,				Nine-Months Ended September 30,
($ in thousands)	2013		2012		2013		2012
Average recorded investment in nonaccrual loans	$	39,159	$	49,788	$	41,039	$	53,809
Total cash basis interest income recognized on nonaccrual loans		521		633		1,729		2,055
Average recorded investment in accruing TDR loans		11,423		14,380		14,482		10,341
Total interest income recognized on accruing TDR loans under modified terms		152		233		581		493

Age analysis of our loan portfolio by segment at September 30, 2013 is summarized as follows:

($ in thousands)	Total Portfolio		Current		Past Due 31-59 Days		Past Due 60-89 Days		Past Due 90 or more Days		Total Past Due		Total Classified Nonaccrual
Accruing Loans:
Commercial real estate		$   780,338		$   758,670		$        -		$  3,265		$  18,403		$21,668		$          -
Multifamily		208,225		208,225		-		-		-		-		-
One to four family		68,662		68,662		-		-		-		-		-
Land		5,881		5,881		-		-		-		-		-
All other		1,477		1,477		-		-		-		-		-
Total accruing loans		1,064,583		1,042,915		-		3,265		18,403		21,668		-
Nonaccrual Loans (1):
Commercial real estate		37,234		36,720		-		-		514		514		37,234
Multifamily		2,283		2,283		-		-		-		-		2,283
Total nonaccrual loans		39,517		39,003		-		-		514		514		39,517
Total loans		$1,104,100		$1,081,918		$        -		$3,265		$18,917		$22,182		$39,517
Age analysis of our loan portfolio by segment at December 31, 2012 is summarized as follows:
($ in thousands)	Total Portfolio		Current		Past Due 31-59 Days		Past Due 60-89 Days		Past Due 90 or more Days		Total Past Due		Total Classified Nonaccrual
Accruing Loans:
Commercial real estate		$   816,357		$   799,130		$12,836		$        -		$ 4,391		$17,227		$          -
Multifamily		198,942		198,942		-		-		-		-		-
One to four family		41,676		41,676		-		-		-		-		-
Land		6,882		4,221		2,661		-		-		2,661		-
All other		1,308		1,308		-		-		-		-		-
Total accruing loans		1,065,165		1,045,277		15,497		-		4,391		19,888		-
Nonaccrual Loans (1):
Commercial real estate		35,856		32,701		-		-		3,155		3,155		35,856
Multifamily		9,757		7,261		-		-		2,496		2,496		9,757
Land		285		285		-		-		-		-		285
Total nonaccrual loans		45,898		40,247		-		-		5,651		5,651		45,898
Total loans		$1,111,063		$1,085,524		$15,497		$        -		$10,042		$25,539		$45,898

(1) The amount of nonaccrual loans in the current column included $35.8 million of TDRs at September 30, 2013 and $36.3 million of TDRs at December 31, 2012 for which payments are being made in accordance with their restructured terms, but the loans were maintained on nonaccrual status in accordance with regulatory guidance. The remaining portion at both dates was comprised of certain paying loans classified nonaccrual due to concerns regarding the borrowers’ ability to continue making payments. Interest income from loan payments on all loans in nonaccrual status is recognized on a cash basis, provided the remaining principal balance is deemed collectible.

13

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3 - Loans Receivable, Continued

Information regarding the credit quality of the loan portfolio based on internally assigned grades follows:

($ in thousands)	Pass		Special Mention		Substandard (1)		Total
At September 30, 2013
Commercial real estate		$   743,233		$15,183		$59,156		$   817,572
Multifamily		204,994		2,374		3,140		210,508
One to four family		68,662		-		-		68,662
Land		4,079		-		1,802		5,881
All other		1,477		-		-		1,477
Total loans		$1,022,445		$17,557		$64,098		$1,104,100
Allocation of allowance for loan losses		$     20,626		$     410		$  5,741		$     26,777
At December 31, 2012
Commercial real estate		$   775,136		$17,041		$60,036		$   852,213
Multifamily		193,738		2,384		12,577		208,699
One to four family		41,676		-		-		41,676
Land		4,566		-		2,601		7,167
All other		1,308		-		-		1,308
Total loans		$1,016,424		$19,425		$75,214		$1,111,063
Allocation of allowance for loan losses		$     20,037		$     443		$  7,623		$     28,103

(1) Substandard loans consist of $39.5 million of nonaccrual loans, $6.0 million of accruing TDRs and $18.6 million of other performing loans at September 30, 2013, compared to $45.9 million of nonaccrual loans, $20.1 million of accruing TDRs and $9.2 million of other performing loans at December 31, 2012. At September 30, 2013, we also had one accruing TDR for $5.4 million which was rated pass.

The geographic distribution of the loan portfolio by state follows:

($ in thousands)	At September 30, 2013				At December 31, 2012
	Amount		% of Total		Amount		% of Total
New York		$   667,265		60.0%	$	717,141		64.5%
Florida		314,274		29.0		286,619		25.8
New Jersey		18,125		1.6		26,425		2.4
North Carolina		17,746		1.6		14,256		1.3
Pennsylvania		17,022		1.5		10,270		0.9
Georgia		16,246		1.5		11,752		1.1
Virginia		11,560		1.0		11,758		1.1
Kentucky		10,619		1.0		7,512		0.7
South Carolina		9,272		0.8		5,853		0.5
Connecticut		8,482		0.8		11,216		1.0
Tennessee		5,626		0.5		770		0.0
Ohio		2,236		0.2		2,260		0.2
South Dakota		1,802		0.2		2,086		0.2
All other states		3,825		0.3		3,145		0.3
		$1,104,100		100.0%	$	1,111,063		100.0%

Information regarding loans restructured during the nine-months ended September 30, 2013 follows:

	Number of Loans	Recorded Investment
($ in thousands)		Pre-Modification		Post-Modification
Commercial real estate – interest rate reduced	2		$9,159		$9,159

Information regarding loans restructured during the nine-months ended September 30, 2012 is as follows:

	Number of Loans	Recorded Investment
($ in thousands)		Pre-Modification		Post-Modification
Land – extended maturity date	2		$520		$520

During the nine-months ended September 30, 2013, there was one TDR (which loan was modified within the previous 12 months) in the amount of $3.0 million that defaulted in March 2013. This loan subsequently was paid off in June 2013. During the nine-months ended September 30, 2013, one TDR in the amount of $1.9 million matured. This loan was re-financed by INB and transferred to a performing non-TDR category since the borrower was no longer experiencing financial difficulties. For the nine-months ended September 30, 2012, there were no TDRs that defaulted or TDRs transferred to a non-TDR loan category.

14

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 3 - Loans Receivable, Continued

The distribution of TDRs by accruing versus non-accruing, by loan type and by geographic distribution follows:

($ in thousands)	At September 30, 2013		At December 31, 2012
Performing - nonaccrual status		$35,768		$36,291
Performing - accrual status		11,381		20,076
		$47,149		$56,367
Commercial real estate		$42,207		$43,685
Multifamily		3,140		10,081
Land		1,802		2,601
		$47,149		$56,367
New York		$  8,265		$18,478
Florida		27,387		33,920
New Jersey		-		883
Georgia		8,695		-
Ohio		1,000		1,000
South Dakota		1,802		2,086
		$47,149		$56,367

Note 4 - Allowance for Loan Losses

Activity in the allowance for loan losses by loan type for the periods indicated is as follows:

($ in thousands)	Commercial Real Estate			Multifamily			One to Four Family		Land			All Other			Total
Quarter Ended September 30, 2013
Balance at beginning of period		$17,596			$5,098			$2,795		$   956			$10			$26,455
Loan chargeoffs		-			-			-		-			-			-
Loan recoveries (1)		67			5			-		-			-			72
Provision (credit) for loan losses		(175	)		212			229		(15	)		(1	)		250
Balance at end of period		$17,488			$5,315			$3,024		$   941			$  9			$26,777
Quarter Ended September 30, 2012
Balance at beginning of period		$18,343			$8,480			$   502		$1,509			$10			$28,844
Loan chargeoffs		(548	)		-			-		-			-			(548)
Loan recoveries		63			23			-		-			-			86
Provision (credit) for loan losses		468			(381	)		250		(337	)		-			-
Balance at end of period		$18,326			$8,122			$ 752		$1,172			$10			$28,382

Activity in the allowance for loan losses by loan type for the periods indicated is as follows:

($ in thousands)	Commercial Real Estate			Multifamily			One to Four Family		Land			All Other		Total
Nine-Months Ended September 30, 2013
Balance at beginning of period		$19,051			$6,881			$1,120		$1,043			$  8		$28,103
Loan chargeoffs		(1,932	)		(6	)		-		-			-		(1,938)
Loan recoveries (1)		947			682			-		483			-		2,112
Provision (credit) for loan losses		(578	)		(2,242	)		1,904		(585	)		1		(1,500)
Balance at end of period		$17,488			$5,315			$3,024		$   941			$  9		$26,777
Nine-Months Ended September 30, 2012
Balance at beginning of period		$19,156			$8,848			$332		$2,069			$10		$30,415
Loan chargeoffs		(2,215	)		(261	)		-		-			-		(2,476)
Loan recoveries		383			60			-		-			-		443
Provision for loan losses		1,002			(525	)		420		(897	)		-		-
Balance at end of period		$18,326			$8,122			$752		$1,172			$10		$28,382

(1) See note 14 to financial statements in this report for a discussion on recoveries.

15

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 4 - Allowance for Loan Losses, Continued

The following tables set forth the balances of our loans receivable by segment and impairment evaluation and the allowance for loan losses associated with such loans at the dates indicated.

($ in thousands)	Commercial   Real Estate		Multifamily		One to Four   Family		Land		All Other		Total
At September 30, 2013
Loans:
Individually evaluated for impairment		$  45,955		$    3,141		$           -		$1,802		$         -		$     50,898
Collectively evaluated for impairment		771,617		207,367		68,662		4,079		1,477		1,053,202
Total loans		$817,572		$210,508		$68,662		$5,881		$1,477		$1,104,100
Allowance for loan losses:
Individually evaluated for impairment (1)		$    3,663		$       596		$           -		$   498		$        -		$       4,757
Collectively evaluated for impairment		13,825		4,719		3,024		443		9		22,020
Total allowance for loan losses		$  17,488		$   5,315		$3,024		$   941		$        9		$     26,777
At December 31, 2012
Loans:
Individually evaluated for impairment		$  50,795		$  12,577		$           -		$2,601		$          -		$     65,973
Collectively evaluated for impairment		801,418		196,122		41,676		4,566		1,308		1,045,090
Total loans		$852,213		$208,699		$41,676		$7,167		$1,308		$1,111,063
Allowance for loan losses:
Individually evaluated for impairment (1)		$    3,825		$    1,542		$           -		$   521		$        -		$       5,888
Collectively evaluated for impairment		15,226		5,339		1,120		522		8		22,215
Total allowance for loan losses		$  19,051		$    6,881		$  1,120		$1,043		$       8		$     28,103

(1) See note 3 to financial statements in this report.

Note 5 - Foreclosed Real Estate and Valuation Allowance for Real Estate Losses

Real estate acquired through foreclosure by property type is summarized as follows:

	At September 30, 2013				At December 31, 2012
($ in thousands)	# of Properties		Amount (1)		# of Properties		Amount (1)
Commercial real estate		3		$  5,334		2		$2,790
Multifamily		1		6,685		3		12,000
Land		-		-		1		1,133
Real estate acquired through foreclosure		4		$12,019		6		$15,923

  (1) Reported net of any associated valuation allowance.

Activity in the valuation allowance for real estate losses is summarized as follows:

	Quarter Ended September 30,						Nine-Months Ended September 30,
($ in thousands)	2013			2012			2013			2012
Valuation allowance at beginning of period		$6,044			$7,945			$5,339			$6,037
Provision for real estate losses		250			1,025			955			2,933
Real estate chargeoffs		(4,171	)		(3,642	)		(4,171	)		(3,642)
Valuation allowance at end of period		$2,123			$5,328			$2,123			$5,328

Note 6 - Deposits

Scheduled maturities of certificates of deposit accounts (CDs) are as follows:

	At September 30, 2013			At December 31, 2012
($ in thousands)	Amount		Wtd-Avg Stated Rate	Amount		Wtd-Avg     Stated Rate
Within one year		$434,055	2.91%		$519,236	2.92%
Over one to two years		175,921	2.02		181,698	2.79
Over two to three years		108,008	2.25		89,049	2.74
Over three to four years		105,813	2.60		60,119	3.02
Over four years		73,615	2.02		86,776	2.93
		$897,412	2.54%		$936,878	2.89%

CDs of $100,000 or more totaled $467 million at September 30, 2013 and $463 million at December 31, 2012 and included brokered CDs of $85 million and $78 million, respectively.

16

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 6 – Deposits, Continued

At September 30, 2013, all CDs of $100,000 or more (inclusive of brokered CDs) by remaining maturity were as follows: $220 million due within one year; $77 million due over one to two years; $60 million due over two to three years; $64 million due over three to four years; and $46 million due thereafter. At September 30, 2013, brokered CDs had a weighted average rate of 3.48% and their remaining maturities were as follows: $32 million due within one year; $5 million due over one to two years; $8 million due over two to three years; $24 million due over three to four years and $16 million due over four years.

Note 7 - Lines of Credit

At September 30, 2013, INB had $24 million of unsecured credit lines that were cancelable by the lender at any time. As a member of the Federal Home Loan Bank of New York (FHLB) and the Federal Reserve Bank of New York (FRB), INB can borrow from these institutions on a secured basis. At September 30, 2013, INB had available collateral consisting of investment securities and certain loans that could be pledged to support additional total borrowings of approximately $441 million from the FHLB and FRB, if needed. There were no borrowings during 2013.

The following is a summary of certain information regarding FHLB advances in the aggregate.

	At or For the Quarter Ended September 30,				At or For the Nine-Months Ended   September 30,
($ in thousands)	2013		2012		2013		2012
Balance at period end		-		$  7,000		-		$  7,000
Maximum amount outstanding at any month end for the period		-		$10,500		-		$13,500
Average outstanding balance for the period		-		$  9,511		-		$11,215
Weighted-average interest rate paid for the period		-		4.31%		-		4.26%
Weighted-average interest rate at period end		-		4.22%		-		4.22%

Note 8 - Subordinated Debentures - Capital Securities

Capital Securities (commonly referred to as trust preferred securities) outstanding are summarized as follows:

	At September 30, 2013					At December 31, 2012
($ in thousands)	Principal		Accrued Interest Payable		Interest Rate	Principal		Accrued Interest Payable		Interest     Rate
Capital Securities II - debentures due September 17, 2033		$15,464		$147	3.20%		$15,464		$1,661	3.26%
Capital Securities III - debentures due March 17, 2034		15,464		139	3.04%		15,464		1,577	3.10%
Capital Securities IV - debentures due September 20, 2034		15,464		119	2.65%		15,464		1,370	2.71%
Capital Securities V - debentures due December 15, 2036		10,310		58	1.90%		10,310		1,620	1.96%
		$56,702		$463			$56,702		$6,228

The securities are obligations of IBC’s wholly owned statutory business trusts, Intervest Statutory Trust II, III, IV and V, respectively. Each Trust was formed with a capital contribution from IBC and for the sole purpose of issuing and administering the Capital Securities. The proceeds from the issuance of the Capital Securities together with the capital contribution for each Trust were used to acquire IBC’s Junior Subordinated Debentures (the “Debentures”) that are due concurrently with the Capital Securities. The Capital Securities, net of IBC’s capital contributions of $1.7 million, total $55 million and qualify as regulatory Tier 1 capital up to certain limits. IBC has guaranteed the payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to the Capital Securities. Issuance costs associated with Capital Securities II, III and IV were capitalized and are being amortized over the contractual life of the securities using the straight-line method. The unamortized balance totaled approximately $0.7 million at September 30, 2013. There were no issuance costs for Capital Securities V.

Interest payments on the Debentures (and the corresponding distributions on the Capital Securities) are payable in arrears as follows:

��� Capital Securities II - quarterly at the rate of 2.95% over 3 month libor;

— Capital Securities III - quarterly at the rate of 2.79% over 3 month libor;

— Capital Securities IV- quarterly at the rate of 2.40% over 3 month libor; and

— Capital Securities V - quarterly at the rate of 1.65% over 3 month libor.

17

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 8 - Subordinated Debentures - Capital Securities, Continued

Interest payments may be deferred at any time and from time to time during the term of the Debentures at IBC’s election for up to 20 consecutive quarterly periods, or 5 years, with no limitations on the number of deferral periods IBC may elect, provided, however, no deferral period may extend beyond the maturity date of the Debentures. During an interest deferral period, interest will continue to accrue on the Debentures and interest on such accrued interest will accrue at an annual rate equal to the interest rate in effect for such deferral period, compounded quarterly from the date such interest would have been payable were it not deferred. At the end of the deferral period, IBC will be obligated to pay all interest then accrued and unpaid. During the deferral period, among other restrictions, IBC and any affiliate cannot, subject to certain exceptions: (i) declare or pay any dividends or distributions on, or redeem, purchase or acquire any capital stock of IBC or its affiliates (other than payment of dividends to IBC); or (ii) make any payment of principal or interest or premium on, or repay, repurchase or redeem any debt securities of IBC or its affiliates that rank pari passu with or junior to the Debentures. In February 2010, as required by its primary regulator, IBC exercised its right to defer interest payments as described above. In June 2013, IBC, with approval from its regulator, repaid all accrued interest payments in arrears as of that date on the Debentures. In September 2013, IBC again exercised its right to defer interest payments on the Debentures due to the restrictions of its written agreement with its regulator.

The Capital Securities are subject to mandatory redemption as follows: (i) in whole, but not in part, upon repayment of the Debentures at stated maturity or earlier, at the option of IBC, within 90 days following the occurrence and continuation of certain changes in the tax or capital treatment of the Capital Securities, or a change in law such that the statutory trust would be considered an investment company, contemporaneously with the redemption by IBC of the Debentures; and (ii) in whole or in part at any time contemporaneously with the optional redemption by IBC of the Debentures in whole or in part. Any redemption would be subject to the receipt of regulatory approvals.

Note 9 - Stockholders’ Equity and Redemption of Preferred Stock

IBC is authorized to issue up to 62.3 million shares of its capital stock, consisting of 62 million shares of common stock and 300,000 shares of preferred stock. IBC’s board of directors determines the powers, preferences and rights, and the qualifications, limitations, and restrictions thereof on any series of preferred stock issued.

From December 23, 2008 through June 24, 2013 a total of 25,000 shares of preferred stock were designated as Series A (the “Preferred Stock”) and were owned by the U.S. Department of the Treasury (the “Treasury”). The Preferred Stock was issued to the Treasury by IBC in connection with IBC’s participation in the Capital Purchase Program (the “CPP”) under the Treasury’s Troubled Asset Relief Program (“TARP”), together with a ten-year warrant (the “Warrant”) to purchase 691,882 shares of IBC’s common stock at an exercise price of $5.42 per share. As described in greater detail in note 10 to the financial statements in our 2012 10-K, in February 2010, IBC ceased the declaration and payment of dividends on the Preferred Stock as required by IBC’s primary regulator.

On June 6, 2013, the Treasury announced its intent to sell its investment in IBC’s Preferred Stock, along with similar investments the Treasury had made in five other financial institutions, primarily to qualified institutional buyers and certain institutional accredited investors. IBC sought and obtained regulatory approvals allowing it to participate in the auction. Using a modified Dutch auction methodology that established a market price by allowing investors to submit bids at specified increments during the period from June 10 through June 13, 2013, the Treasury auctioned all of IBC’s 25,000 shares of Preferred Stock. IBC was the winning bidder on 6,250 shares of the Preferred Stock and the remaining 18,750 shares were purchased by unrelated third parties. The closing price of the auctioned shares was $970.00 per share. On June 24, 2013, IBC completed the repurchase of 6,250 shares of the Preferred Stock from the Treasury and those shares were retired. The shares were repurchased for $6.1 million, plus an additional $1.2 million in accrued and unpaid dividends through June 24, 2013, for a total of $7.3 million.

On August 15, 2013, IBC redeemed the remaining 18,750 shares of the Preferred Stock held by the unrelated third parties for a purchase price equaling the stated liquidation value of $1,000 per share, plus accumulated and unpaid dividends earned through August 15, 2013. The total cost of redeeming these shares was $22.6 million, which included $3.9 million of preferred dividends. IBC received all necessary regulatory approvals to complete the redemption. The Treasury continues to hold the Warrant as of September 30, 2013.

18

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 10 - Common Stock Warrant, Options and Restricted Common Stock

IBC has shareholder-approved plans, the 2006 Long Term Incentive Plan and the 2013 Equity Incentive Plan (together referred to as the “Plans”) under which stock options, restricted stock and other forms of incentive compensation may be awarded from time to time to officers, employees and directors of IBC and its subsidiaries. The maximum number of shares of common stock that may be awarded under the Plans is 2,250,000. At September 30, 2013, 777,993 shares of common stock were available for award under the Plans. There were no awards of stock options in the first nine months of 2013 or 2012.

A summary of activity in outstanding common stock options and related information follows:

	Exercise Price Per Warrant/Option																		Wtd-Avg.     Exercise     Price
($ in thousands, except per share amounts)	$5.42 (1)		$17.10			$7.50			$4.02			$3.00			$2.55		Total
Outstanding at December 31, 2012		691,882		116,640			120,190			68,910			38,200			42,300		1,078,122		$6.63
Forfeited/expired (2)		-		(1,200	)		(1,200	)		(1,100	)		(1,900	)		(3,300)		(8,700)		$5.52
Options exercised		-		-			-			(9,600	)		(3,200	)		(2,167)		(14,967)		$3.59
Outstanding at September 30, 2013		691,882		115,440			118,990			58,210			33,100			36,833		1,054,455		$6.68
Expiration date		12/23/18		12/13/17			12/11/18			12/10/19			12/09/20			12/08/21
Vested and exercisable (3)		100%		100%			100%			100%			67%			33%		96%
Wtd-avg contractual remaining term (in years)		5.2		4.2			5.2			6.2			7.2			8.2		5.4
Intrinsic value at September 30, 2013 (4)		$1,737		-			$51			$228			$163			$198		$2,377

(1) This is the warrant held by the U.S. Treasury as described in note 9 to the financial statements in this report.

(2) Represent options forfeited or expired unexercised.

(3) The $3.00 options further vest and become 100% exercisable on December 9, 2013. The $2.55 options further vest and become exercisable at the rate of 33.33% on December 8, 2013 and 2014. Full vesting may occur earlier upon the occurrence of certain events as defined in the option agreement.

(4) Intrinsic value was calculated using the closing price of IBC’s common stock on September 30, 2013 of $7.93.

A summary of selected information regarding restricted common stock awards made under the Plans during the nine months ended September 30, 2013 and 2012 follows:

($ in thousands, except per share amounts)	Stock Grant		Stock Grant
Grant date of award		1/24/13		1/19/12
Total restricted shares of stock awarded (1)		330,700		465,400
Estimated fair value per share awarded (2)		$4.50		$2.90
Total estimated fair value of award		$1,488		$1,350
Awards scheduled to vest as follows:
January 2013		-		256,800
January 2014		49,566		133,455
January 2015		170,888		75,145
January 2016		110,246		-
		330,700		465,400

(1) For the 2012 period, awards were as follows: a total of 175,000 shares to five executive officers (vesting in two installments, with two thirds vesting on the second anniversary of the grant and the remaining one third on the third anniversary of the grant); a total of 240,000 shares to six non-employee directors (vesting 100% on the first anniversary of the grant); and a total of 50,400 shares to other officers and employees (vesting in three equal installments, with one third on each of the next three anniversary dates of the grant).

For the 2013 period, awards were as follows: a total of 182,000 shares to five executive officers (vesting in two installments, with two thirds vesting on the second anniversary of the grant and the remaining one third on the third anniversary of the grant); a total of 80,000 shares to eight non-employee directors and 68,700 shares to other officers and employees (vesting in three equal installments, with one third on each of the next three anniversary dates of the grant).

(2) Fair value of each award was estimated as of the grant date based on the closing market price of the common stock on the grant date.

A summary of activity in outstanding restricted common stock and related information follows:

	Price Per Share
	$2.35			$2.90			$4.50		Total
Outstanding at December 31, 2012		317,500			464,800			-		782,300
Shares vested and no longer restricted		-			(256,600	)		-		(256,600)
Shares granted		-			-			330,700		330,700
Shares forfeited		(7,100	)		(6,133	)		(5,400)		(18,633)
Outstanding at September 30, 2013 (1) (2)		310,400			202,067			325,300		837,767

19

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 10 - Common Stock Warrant, Options and Restricted Common Stock, Continued

Notes to the preceding table follow:

(1) All outstanding shares of restricted common stock were unvested at September 30, 2013 and subject to forfeiture. Shares issued at a price of $2.35 on December 9, 2010 will vest 100% on December 9, 2013. Shares issued at a price of $2.90 on January 19, 2012 will vest as follows: 130,200 on January 19, 2014 and 71,867 on January 19, 2015. Shares issued at a price of $4.50 on January 24, 2013 will vest as follows: 47,767 on January 24, 2014, 169,100 on January 24, 2015 and 108,433 on January 24, 2016.

(2) Vesting is subject to the grantee’s continued employment with us or, in the case of non-employee directors, the grantee’s continued service as our director on the vesting dates. All of the awards are subject to accelerated vesting upon the death or disability of the grantee or upon a change in control of IBC, as defined in the restricted stock agreements. The record holder of IBC’s restricted shares of common stock possesses all the rights of a holder of our common stock, including the right to receive dividends on and to vote the restricted shares. The restricted shares may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated until they become fully vested and transferable in accordance with the agreements. Prior to June 24, 2013, shares held by certain of our executive officers had further restrictions on transferability due to IBC’s participation in the TARP program.

Stock-based compensation expense is recognized on a straight-line basis and is recorded in “Salaries and Employee Benefits” with a corresponding increase to stockholders’ equity as paid in capital over the vesting period of each award and is as follows: for the quarter ended September 30, 2013 and 2012, $231,000 and $309,000, respectively, and for the nine-months ended September 30, 2013 and 2012, $731,000 and $885,000, respectively. At September 30, 2013, pre-tax compensation expense related to all nonvested awards of options and restricted stock not yet recognized totaled $1.5 million and such amount is expected to be recognized in the future over a weighted average period of approximately 2.0 years.

Our income taxes payable in the first nine months of 2013 was reduced by the excess income tax benefit associated with the vesting of restricted common stock awards and the exercise of stock option awards (calculated as the difference between the fair market value of the stock at the vesting date versus the grant date in the case of stock awards and the difference between the fair market value of the stock at the exercise date versus the exercise price per share in the case of options, multiplied by our effective income tax rate). The net tax benefit amounted to $150,000 and is required to be recorded as an increase to our paid-in capital. There was no such tax benefit for the same 2012 period.

Note 11 - Deferred Tax Asset

At September 30, 2013 and December 31, 2012, we had a deferred tax asset totaling $21.8 million and $29.2 million, respectively. The tax asset relates to the unrealized benefit for net temporary differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases that will result in future income tax deductions as well as an unused net operating loss carryforward (NOL) and Federal AMT credit carryforward, all of which can be applied against and reduce our future taxable income and tax liabilities.

At September 30, 2013, the gross NOL amounted to approximately $2 million for Federal purposes and $34 million for state and local purposes and the Federal AMT credit carryforward amounted to $1.8 million. The NOL carryforwards expire in 2030. The AMT credit carryforward has no expiration date. We have determined that a valuation allowance for our deferred tax asset was not required at any time during the reporting periods in this report because we believe that it is more likely than not that our deferred tax asset will be fully realized. This conclusion is based on prior taxable earning history as well as our ability to generate sufficient future taxable earnings to recognize our deferred tax asset, as discussed in this report and in note 14 to the financial statements in our 2012 10-K.

20

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 12 - Earnings Per Common Share

Net earnings applicable to common stockholders and the weighted-average number of shares used for basic and diluted earnings per common share computations are summarized in the table that follows:

	Quarter Ended September 30,				Nine-Months Ended September 30,
	2013		2012		2013		2012
Basic Earnings Per Common Share:
Net earnings available to common stockholders		$2,588,000		$2,225,000		$9,230,000		$7,347,000
Weighted-Average number of common shares outstanding		21,915,596		21,589,744		21,891,886		21,558,092
Basic Earnings Per Common Share		$0.12		$0.10		$0.42		$0.34
Diluted Earnings Per Common Share:
Net earnings available to common stockholders		$2,588,000		$2,225,000		$9,230,000		$7,347,000
Weighted-Average number of common shares outstanding:
Common shares outstanding		21,915,596		21,589,744		21,891,886		21,558,092
Potential dilutive shares resulting from exercise of warrants /options (1)		135,866		978		81,064		276
Total average number of common shares outstanding used for dilution		22,051,462		21,590,722		21,972,950		21,558,368
Diluted Earnings Per Common Share		$0.12		$0.10		$0.42		$0.34

(1) All outstanding options/warrants to purchase shares of our common stock were considered for the Diluted EPS computations and only those that were dilutive (as determined by using the treasury stock method prescribed by GAAP) were included in the diluted earnings per share computations above. For both the quarter and nine-month periods of 2013 and 2012 calculations, 234,430 and 1,041,122, respectively, of options/warrants to purchase shares of common stock were not dilutive because the exercise price per share of each option/warrant was above the average market price of our common stock during these periods.

Note 13 - Off-Balance Sheet Financial Instruments

INB is party to financial instruments with off-balance sheet risk in the normal course of its business to meet the financing needs of its customers. These instruments can be in the form of commitments to extend credit, unused lines of credit and standby letters of credit, and may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in our financial statements. Our maximum exposure to credit risk is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and normally require payment of fees to INB. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. Standby letters of credit are conditional commitments issued by INB to guarantee the performance of its customer to a third party. The credit risk involved in the underwriting of letters of credit is essentially the same as that involved in originating loans. INB had no standby letters of credit outstanding at September 30, 2013 or December 31, 2012.

The contractual amounts of off-balance sheet financial instruments are as follows:

($ in thousands)	At September 30, 2013		At December 31, 2012
Commitments to extend credit		$30,672		$19,154
Unused lines of credit		677		854
		$31,349		$20,008

Note 14 - Contingencies

We are periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as foreclosure proceedings. Based on review and consultation with our legal counsel, we do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, financial position or liquidity.

21

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 14 – Contingencies, Continued

In the first and second quarters of 2013, INB entered into settlement agreements with respect to certain litigation INB had pursued in connection with foreclosure actions it had commenced in 2010 on several of its loans. INB commenced the actions to collect, in one case, insurance proceeds, which it contended had been improperly paid to various third parties, and in another case, damages due to alleged legal malpractice when the loan was originated. As a result of these settlements, INB received net proceeds totaling $2.7 million and $0.1 million in the first and second quarter of 2013, respectively, which was recorded as $1.1 million of recoveries of prior loan charge offs and $1.6 million of recoveries of prior real estate expenses associated with two loans and underlying collateral property.

Note 15 - Regulatory Matters and Regulatory Capital

Since January 2011, IBC has been operating under a written agreement with its primary regulator, the Federal Reserve Bank of New York (the “FRB”). From December 2010 through March 20, 2013, INB was also operating under a formal agreement with its primary regulator, the Office of the Comptroller of the Currency (the “OCC”). Both of these agreements, including various restrictions arising therefrom, have affected our business. For a discussion of the agreements and related restrictions, see note 19 to the financial statements in our 2012 10-K.

On March 21, 2013, INB received notification from the OCC that actions taken by INB since December 2010 satisfied the OCC’s regulatory directives and the Formal Agreement dated December 9, 2010 between INB and the OCC was terminated. As a result, INB is no longer subject to any regulatory agreement or to the related restrictions described in our 2012 10-K. Additionally, effective March 21, 2013, the OCC terminated its heightened regulatory capital requirements that had been imposed on INB since February 2010. As of the filing date of this report, IBC remained subject to its written agreement with the FRB and the restrictions contained therein. IBC has been informed by the FRB that it is reviewing the need for such agreement and IBC has advised the FRB that in IBC’s view it has complied with all of the requirements of the written agreement.

At September 30, 2013 and December 31, 2012, we believe that IBC and INB met all regulatory capital adequacy requirements to which they were subject. As of the date of filing of this report, we are not aware of any conditions or events that would have changed the status of such compliance with those requirements at September 30, 2013.

Information regarding our regulatory capital and related ratios is summarized as follows:

	INB				IBC Consolidated
	At September 30,		At December 31,		At September 30,		At December 31,
($ in thousands)	2013		2012		2013		2012
Tier 1 capital (1)		$234,166		$244,081		$238,955		$249,465
Tier 2 capital		15,377		15,566		15,416		15,620
Total risk-based capital		$249,543		$259,647		$254,371		$265,085
Net risk-weighted assets for regulatory purposes		$1,218,718		$1,232,670		$1,221,807		$1,238,024
Average assets for regulatory purposes		$1,563,834		$1,690,329		$1,568,881		$1,696,410
Total capital to risk-weighted assets		20.48%		21.06%		20.82%		21.41%
Tier 1 capital to risk-weighted assets		19.21%		19.80%		19.56%		20.15%
Tier 1 capital to average assets		14.97%		14.44%		15.23%		14.71%

(1) IBC’s consolidated Tier 1 capital for both dates included $55 million of IBC’s outstanding qualifying trust preferred securities, which are discussed in further detail in note 8 to the financial statements in this report .

22

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 15 - Regulatory Matters and Regulatory Capital, Continued

The table that follows presents information regarding our actual capital and minimum capital requirements.

	Actual Capital				Minimum Under Prompt Corrective Action Provisions				Minimum To Be “Well Capitalized” Under Prompt Corrective Action Provisions				Minimum Under Agreement With OCC
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
IBC Consolidated at September 30, 2013:
Total capital to risk-weighted assets (1)		$254,371		20.82%		$97,745		8.00%		NA		NA		NA		NA
Tier 1 capital to risk-weighted assets (1)		$238,955		19.56%		$48,872		4.00%		NA		NA		NA		NA
Tier 1 capital to average assets (1)		$238,955		15.23%		$62,755		4.00%		NA		NA		NA		NA
IBC Consolidated at December 31, 2012:
Total capital to risk-weighted assets		$265,085		21.41%		$99,042		8.00%		NA		NA		NA		NA
Tier 1 capital to risk-weighted assets		$249,465		20.15%		$49,521		4.00%		NA		NA		NA		NA
Tier 1 capital to average assets		$249,465		14.71%		$67,856		4.00%		NA		NA		NA		NA
INB at September 30, 2013:
Total capital to risk-weighted assets		$249,543		20.48%		$97,497		8.00%		$121,872		10.00%		NA		NA
Tier 1 capital to risk-weighted assets		$234,166		19.21%		$48,749		4.00%		$  73,123		6.00%		NA		NA
Tier 1 capital to average assets		$234,166		14.97%		$62,553		4.00%		$  78,192		5.00%		NA		NA
INB at December 31, 2012:
Total capital to risk-weighted assets		$259,647		21.06%		$98,614		8.00%		$123,267		10.00%		$147,920		12.00%
Tier 1 capital to risk-weighted assets		$244,081		19.80%		$49,307		4.00%		$  73,960		6.00%		$123,267		10.00%
Tier 1 capital to average assets		$244,081		14.44%		$67,613		4.00%		$  84,516		5.00%		$152,130		9.00%

(1) Assuming IBC had excluded all of its eligible outstanding trust preferred securities (which totaled $55 million) from its Tier 1 capital and included the entire amount in its Tier 2 capital, consolidated proforma capital ratios at September 30, 2013 would have been 20.82%, 15.06% and 11.73%, respectively.

The table that follows presents additional information regarding our capital adequacy at September 30, 2013.

	INB Regulatory Capital						Consolidated Regulatory Capital
($ in thousands)	Actual		Required (1)		Excess		Actual		Required		Excess
Total capital to risk-weighted assets		$249,543		$121,872		$127,671		$254,371		$97,745		$156,626
Tier 1 capital to risk-weighted assets		$234,166		$  73,123		$161,043		$238,955		$48,872		$190,083
Tier 1 capital to average assets		$234,166		$  78,192		$155,974		$238,955		$62,755		$176,200

(1) Minimum amount required to be considered “Well-Capitalized.”

Note 16 - Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain of our assets and liabilities and to determine our fair value disclosures. In accordance with GAAP, we group our assets and liabilities at fair value into three levels (Level 1, 2 and 3), based on the markets in which they are traded and the reliability of the assumptions that are used to determine their fair value. Level 1 has the highest level of reliability because fair value is based on actively traded markets. See our 2012 10-K, note 20 to the financial statements, for a further discussion of all the valuation levels.

At September 30, 2013 and December 31, 2012, we only had approximately $1.0 million of assets (comprised of securities available for sale using Level 1 inputs) and no liabilities that were recorded at fair value on a recurring basis.

From time to time, we may be required to record at fair value other assets on a non-recurring basis, such as our impaired loans, impaired investment securities and real estate we own through foreclosure. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or writedowns of individual assets. All of our assets measured at fair value on a nonrecurring basis use Level 3 inputs. We have no liabilities that are recorded at fair value on a nonrecurring basis.

For Level 3, fair value estimates are generally generated from model-based techniques that use significant assumptions that are not observable in the marketplace. These assumptions reflect our estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques for Level 3 include the use of discounted cash flow models. The fair value results obtained from Level 3 valuation techniques cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

23

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 16 - Fair Value Measurements, Continued

The following tables provide information regarding our assets measured at fair value on a nonrecurring basis.

		Outstanding Carrying Value
	At September 30, 2013			At December 31, 2012
($ in thousands)		Level 3		Level 3
Impaired loans (1):
Commercial real estate			$45,956		$50,795
Multifamily			3,140		12,577
Land			1,802		2,601
Total impaired loans			50,898		65,973
Impaired securities (2)			2,604		3,721
Real estate acquired through foreclosure			12,019		15,923

	Accumulated Losses on				Total Losses (Gains) (3)
	Outstanding Balance as of:				Quarter Ended						Nine-Months Ended
	September 30,		December 31,		September 30,						September 30,
($ in thousands)	2013		2012		2013			2012			2013			2012
Impaired loans:
Commercial real estate		$10,294		$  9,979		$    -			$  (254	)		$  823			$  (241)
Multifamily		598		3,092		(7	)		(170	)		(964	)		(100)
Land		500		521		(2	)		-			(23	)		(493)
Total impaired loans		11,392		13,592		(9	)		(424	)		(164	)		(834)
Impaired securities		5,197		4,233		273			-			964			157
Foreclosed real estate		2,123		5,339		149			1,025			135			2,933
Totals		$18,712		$23,164		$413			$     601			$935			$2,256

(1) Comprised of all nonaccrual loans and accruing TDRs. Outstanding carrying value excludes a specific valuation allowance included in the overall allowance for loan losses. See note 4 to the financial statements in this report.

(2) Comprised of certain held-to maturity investments in trust preferred securities considered other than temporarily impaired. See note 2 to the financial statements in this report.

(3) Represents total losses or (gains) recognized on all assets measured at fair value on a nonrecurring basis during the period indicated. The losses or (gains) for impaired loans represent the change (before net chargeoffs) during the period in the corresponding specific valuation allowance, while the losses (gains) for foreclosed real estate represent writedowns in carrying values subsequent to foreclosure (recorded as provisions for real estate losses) adjusted for any recoveries of prior writedowns and gains or losses from the transfer/sale of the properties during the period. The losses on investment securities represent other than temporary impairment “OTTI” writedowns recorded as a component of noninterest income (as described in note 2 to the financial statements in this report).

The following table presents information regarding the change in assets measured at fair value on a nonrecurring basis for the periods indicated

($ in thousands)	Impaired       Securities			Impaired       Loans			Foreclosed       Real Estate
Quarter Ended September 30, 2013
Balance at beginning of period		$2,923			$50,533			$14,869
Net new impaired loans		-			514			-
Other than temporary impairment write downs		(273	)		-			-
Principal repayments/sales		(46	)		(149	)		(2,701)
Writedowns of carrying value subsequent to foreclosure		-			-			(250)
Gains from sales		-			-			101
Balance at end of period		$2,604			$50,898			$12,019
Nine-Months Ended September 30, 2013
Balance at beginning of period		$3,721			$65,973			$15,923
Net new impaired loans		-			8,761			-
Impaired loans transferred to foreclosed real estate		-			(3,040	)		3,040
Other than temporary impairment write downs		(964	)		-			-
Principal repayments/sales		(153	)		(18,858	)		(6,809)
Chargeoffs of impaired loans		-			(1,938	)		-
Writedowns of carrying value subsequent to foreclosure		-			-			(1,029)
Recoveries of prior writedowns		-			-			74
Gains from sales		-			-			820
Balance at end of period		$2,604			$50,898			$12,019

24

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 16 - Fair Value Measurements, Continued

The following table presents information regarding the change in assets measured at fair value on a nonrecurring basis for the periods indicated.

($ in thousands)	Impaired       Securities			Impaired       Loans			Foreclosed       Real Estate
Quarter Ended September 30, 2012
Balance at beginning of period		$4,221			$65,240			$26,370
Net new impaired loans		-			872			-
Impaired loans transferred to foreclosed real estate		-			(1,457	)		1,457
Principal repayments/sales		-			(1,983	)		(4,944)
Chargeoffs of impaired loans		-			(548	)		-
Writedowns of carrying value subsequent to foreclosure		-			-			(1,025)
Balance at end of period		$4,221			$62,124			$21,858
Nine-Months Ended September 30, 2012
Balance at beginning of period		$4,378			$66,269			$28,278
Net new impaired loans		-			8,254			-
Impaired loans transferred to foreclosed real estate		-			(1,457	)		1,457
Other than temporary impairment write downs		(157	)		-			-
Principal repayments/sales		-			(8,466	)		(4,944)
Chargeoffs of impaired loans		-			(2,476	)		-
Writedowns of carrying value subsequent to foreclosure		-			-			(2,933)
Balance at end of period		$4,221			$62,124			$21,858

We are also required by GAAP to disclose the estimated fair value of each class of our financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current estimated amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for our various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Additionally, the estimated fair value of our non-financial instruments is excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented in the table that follows may not necessarily represent the underlying fair value of our Company.

The fair value estimates shown in the table that follows are made at a specific point in time based on available information. A significant portion of our financial instruments, such as our mortgage loans, do not have an active marketplace in which they can be readily sold or purchased to determine fair value. Consequently, fair value estimates for such instruments are based on assumptions made by us that include the instrument’s credit risk characteristics and future estimated cash flows and prevailing interest rates. As a result, these fair value estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision.

Accordingly, changes in any of our assumptions could cause the fair value estimates to deviate substantially. Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. A discussion regarding the assumptions used to compute the estimated fair values disclosed in the table that follows can be found in note 20 to the financial statements in our 2012 10-K.

25

Intervest Bancshares Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 16 - Fair Value Measurements, Continued

The carrying and estimated fair values of our financial instruments are as follows:

	At September 30, 2013				At December 31, 2012
($ in thousands)	Carrying Value		Fair Value		Carrying Value		Fair   Value
Financial Assets:
Cash and cash equivalents (1)	$	30,253	$	30,253	$	60,395	$	60,395
Time deposits with banks (1)		5,370		5,370		5,170		5,170
Securities available for sale, net (1)		1,016		1,016		1,000		1,000
Securities held to maturity, net (2)		416,321		410,304		443,777		442,166
FRB and FHLB stock (3)		8,237		8,237		8,151		8,151
Loans receivable, net (3)		1,073,500		1,072,203		1,079,363		1,102,333
Loan fees receivable (3)		2,511		1,973		3,108		2,547
Accrued interest receivable (3)		4,735		4,735		5,191		5,191
Total Financial Assets	$	1,541,943	$	1,534,091	$	1,606,155	$	1,626,953
Financial Liabilities:
Deposits (3)	$	1,298,403		1,312,522	$	1,362,619	$	1,389,629
Accrued interest payable on deposits (3)		1,398		1,398		2,379		2,379
Borrowed funds plus accrued interest payable (3)		57,165		56,924		62,930		62,448
Off-Balance Sheet Financial Instruments:
Commitments to lend (3)		536		536		386		386
Total Financial Liabilities	$	1,357,502	$	1,371,380	$	1,428,314	$	1,454,842
Net Financial Assets	$	184,441	$	162,711	$	177,841	$	172,111

  (1) We consider these fair value measurements to be Level 1.

  (2) We consider these fair value measurements (except for those related to our corporate security investments, which are considered Level 3) to be Level 1.

  (3) We consider these fair value measurements to be Level 3.

26

Intervest Bancshares Corporation and Subsidiary

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith P.A., P.C., our independent registered public accounting firm, has made a limited review of our financial data as of September 30, 2013 and for the three- and nine-month periods ended September 30, 2013 and 2012 presented in this document, in accordance with the standards established by the Public Company Accounting Oversight Board.

The report of Hacker, Johnson & Smith P.A., P.C. furnished pursuant to Article 10 of Regulation S-X is included on the following page herein.

27

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Intervest Bancshares Corporation

New York, New York:

We have reviewed the accompanying condensed consolidated balance sheet of Intervest Bancshares Corporation and Subsidiary (the “Company”) as of September 30, 2013 and the related condensed consolidated statements of earnings for the three- and nine-month periods ended September 30, 2013 and 2012, and the related condensed consolidated statements of changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2013 and 2012. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of the Company as of December 31, 2012, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2013, we, based on our audit, expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Hacker, Johnson & Smith P.A., P.C.

HACKER, JOHNSON & SMITH P.A., P.C.

Tampa, Florida

November 5, 2013

28

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Intervest Bancshares Corporation (“IBC”) is the parent company of Intervest National Bank (“INB”). References in this report to “we,” “us” and “our” refer to these entities on a consolidated basis, unless otherwise specified. For a discussion of our business, see note 1 to the financial statements in our 2012 Annual Report on Form 10-K (“2012 10-K”). Our business is also affected by various risk factors, which are disclosed beginning on page 28 of our 2012 10-K in Item 1A thereof and updated as needed in Item 1A of Part II of our reports on Form 10-Q. Management’s discussion and analysis of financial condition and results of operations that follows should be read in conjunction with the accompanying financial statements in this report on Form 10-Q as well as our entire 2012 10-K.

Available Information

IBC’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements and any amendments to those reports can be obtained (excluding exhibits) without charge by writing to: Intervest Bancshares Corporation, Attention: Secretary, One Rockefeller Plaza (Suite 400) New York, New York 10020. In addition, the reports (with exhibits) are available on the Securities and Exchange Commission’s website at www.sec.gov. IBC has a website at www.intervestbancsharescorporation.com that is used for limited purposes and contains certain reports after they are electronically filed with or furnished to the SEC. INB also has a website at www.intervestnatbank.com. The information on both of these web sites is not and should not be considered part of this report and is not incorporated by reference in this report.

Critical Accounting Policies

We consider our critical accounting policies to be those that relate to the determination of the following: our allowance for loan losses; our valuation allowance for real estate losses; other than temporary impairment assessments of our security investments; and the need for and amount of a valuation allowance for our deferred tax asset. These items are considered critical accounting estimates because each is highly susceptible to change from period to period and require us to make numerous assumptions about a variety of information that directly affect the calculation of the amounts reported in our consolidated financial statements. For example, the impact of a large unexpected chargeoff could deplete the allowance for loan losses and potentially require us to record increased loan loss provisions to replenish the allowance, which could negatively affect our operating results and financial condition. A detailed discussion of our critical accounting policies and the factors and estimates we use in applying them can be found under the caption “Critical Accounting Policies” on pages 44 to 48 in our 2012 10-K.

Overview

Our net earnings for the third quarter of 2013 (Q3-13) increased 16% to $2.6 million, or $0.12 per share, from $2.2 million, or $0.10 per share, for the third quarter of 2012 (Q3-12). For the first nine months of 2013 (9mths-13), net earnings increased 26% to $9.2 million, or $0.42 per share, from $7.3 million, or $0.34 per share, for the first nine months of 2012 (9mths-12). During Q3-13, the Company also redeemed its remaining shares of outstanding preferred stock, which were originally issued in connection with the U.S Treasury’s TARP program. At September 30, 2013, the Company had no preferred stockholders and its book value per common share was $8.77.

As discussed below, the increase in quarterly earnings was driven primarily by a lower provision for real estate losses and a decrease in net real estate expenses, partially offset by decreases in both net interest income and noninterest income. The increase in year-to-date earnings was a function of those same factors as well as a credit for loan losses.

Financial Operating Highlights

— The provision for loan losses amounted to $0.3 million Q3-13 compared to no provision in Q3-12. The increase was driven primarily by growth in the loan portfolio. For 9mths-13, a net credit for loan losses of $1.5 million was recorded compared to no provisions or credits for loan losses in 9mths-12. The credit was largely a function of partial cash recoveries of prior loan charge offs during the first and second quarters of 2013.

— The provision for real estate losses decreased to $0.2 million in Q3-13 from $1.0 million in Q3-12, and to $0.9 million in 9mths-13 from $2.9 million in 9mths-12, reflecting fewer write-downs in the carrying value of real estate owned through foreclosure (REO).

29

— Real estate expenses, net of rental and other income, decreased to $0.2 million in Q3-13 from $0.9 million in Q3-12, reflecting a lower level of REO. For 9mths-13, REO activities produced net income of $1.1 million, compared to $1.8 million of net expenses in 9mths-12, largely due to $0.8 million of gains from the sale of three properties and $1.6 million of cash recoveries of expenses associated with previously owned properties. Exclusive of these income items, net real estate expenses would have been $1.3 million in 9mths-13, down from $1.8 million in 9mths -12 also reflecting a lower level of REO.

— Net interest and dividend income decreased to $8.8 million in Q3-13, from $9.8 million in Q3-12, and to $26.4 million in 9mths-13 from $29.5 million in 9mths-12. The net interest margin (exclusive of loan prepayment income) amounted to 2.32% in Q3-13, unchanged from Q3-12, and improved to 2.33% in 9mths-13 from 2.23% in 9mths-12.

— Noninterest income decreased to $0.9 million in Q3-13 from $1.2 million in Q3-12, and to $2.3 million in 9mths-13 from $3.7 million in 9mths-12. The decreases for both periods were due to less income from loan prepayments and a higher level of security impairment charges.

— Operating expenses decreased to $3.9 million in Q3-13 from $4.2 million in Q3-12, and to $12.0 million in 9mths-13 from $12.5 million in 9mths-12, primarily due to a decrease in INB’s FDIC insurance expense resulting from a smaller balance sheet and improved risk assessment rating. The Company’s efficiency ratio (which measures its ability to control expenses as a percentage of revenues) continued to be favorable but increased slightly to 40% in Q3-13, from 38% in Q3-12, due to lower revenues.

— Income tax expense amounted to $2.3 million in both Q3-13 and Q3-12. For 9mths-13 income tax expense increased to $8.2 million from $7.3 million in 9mths-12, due to higher pre-tax income.

Financial Condition Highlights

— Assets at September 30, 2013 totaled $1.58 billion compared to $1.67 billion at December 31, 2012, primarily reflecting decreases of $27 million in security investments, and $30 million in cash and short-term investments.

— Loans outstanding increased during Q3-13 by $44 million from June 30, 2013 and totaled $1.10 billion at September 30, 2013, compared to $1.11 billion at December 31, 2012. New loan originations for 9mths-13 increased to $221 million, from $159 million for 9mths-12, while loan repayments also increased to $225 million in 9mths-13, from $165 million in 9mths-12.

— Nonaccrual loans decreased to $39.5 million at September 30, 2013, from $45.9 million at December 31, 2012. Nonaccrual loans included restructured loans (TDRs) of $35.8 million at September 30 and $36.3 million at December 31 that were current and have performed in accordance with their renegotiated terms. At September 30, 2013, such loans had a weighted-average yield of 4.57%.

— The allowance for loan losses at September 30, 2013 was $26.8 million, or 2.43% of total loans, compared to $28.1 million, or 2.54%, at December 31, 2012. The allowance included specific reserves for impaired loans (comprised of all nonaccrual loans and TDRs) at each date totaling $4.8 million and $5.9 million, respectively.

— Securities held to maturity decreased to $416 million at September 30, 2013 from $444 million at December 31, 2012.

— Deposits at September 30, 2013 decreased to $1.30 billion from $1.36 billion at December 31, 2012.

— Borrowed funds and related interest payable at September 30, 2013 decreased to $57.2 million, from $62.9 million at December 31, 2012, reflecting the payment in Q2-13 of accrued interest payable on outstanding debentures.

— REO decreased to $12.0 million at September 30, 2013, from $15.9 million at December 31, 2012. The decrease reflected $6.0 million of sales and $0.9 million of write-downs in carrying value, partially offset by the addition of one property in the amount of $3.0 million.

— Stockholders’ equity decreased to $192 million at September 30, 2013, from $211 million at December 31, 2012, reflecting the redemption of $25 million of preferred stock and payment of $5.1 million of preferred dividends in arrears, partially offset by $10 million of earnings.

— INB’s regulatory capital ratios at September 30, 2013 were well above the minimum requirements to be considered a well-capitalized institution and were as follows: Tier One Leverage - 14.97%; Tier One Risk-Based - 19.21%; and Total Risk-Based Capital - 20.48%.

Other Developments During the First Nine Months of 2013

On March 21, 2013, INB’s primary regulator, the Office of the Comptroller of the Currency (the “OCC”), terminated their Formal Agreement with INB and INB is no longer subject to the operating restrictions required by that agreement. INB is also no longer subject to the OCC’s heightened regulatory capital requirements, which had been imposed on INB and in effect since February 2010. As of the filing date of this report, IBC remained subject to a written agreement with the Federal Reserve Bank of New York (the “FRB”) and the restrictions contained therein (which are discussed in detail in our 2012 10-K). IBC has been informed by the FRB that it is reviewing the need for such agreement and IBC has also advised the FRB that in IBC’s view it has complied with the requirements of the agreement.

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On June 6, 2013, the U.S Treasury announced its intent to sell its investment in IBC’s Series A Fixed Rate Cumulative Perpetual Preferred Stock (the “Preferred Stock”), along with similar investments the Treasury had made in five other financial institutions, primarily to qualified institutional buyers and certain institutional accredited investors in a modified Dutch auction. IBC sought and obtained regulatory approvals allowing it to participate in the auction. Using a modified Dutch auction methodology that established a sales price by allowing investors to submit bids at specified increments during the period from June 10 through June 13, 2013, the Treasury auctioned all of IBC’s 25,000 shares of Preferred Stock. IBC was the winning bidder on 6,250 shares of the Preferred Stock and the remaining 18,750 shares were purchased by unrelated third parties. The closing price of the auctioned shares was $970.00 per share.

On June 24, 2013, IBC completed the repurchase of 6,250 shares of the Preferred Stock from the Treasury and those shares were retired. The shares were repurchased at $970.00 per share or $6.1 million, plus an additional $1.2 million in accumulated and unpaid dividends through June 24, 2013, for a total of $7.3 million. Because the Treasury no longer owns any of IBC’s Preferred Stock, IBC is no longer subject to Treasury’s regulations concerning executive compensation and corporate governance.

On July 17, 2013, IBC announced its intention to redeem the remaining 18,750 shares of Preferred Stock that had been sold by the Treasury to unrelated third parties. IBC obtained all necessary regulatory approvals to complete this transaction. On August 15, 2013, IBC redeemed those shares for a purchase price equaling the stated liquidation value of $1,000 per share, plus any accumulated and unpaid dividends that have been earned thereon through August 15, 2013. The total cost of redeeming the 18,750 shares was $22.6 million, which included $3.9 million of preferred dividends. At September 30, 2013, the Treasury continued to hold a warrant to purchase 691,882 shares of IBC’s common stock at an exercise price of $5.42 per share.

Comparison of Financial Condition at September 30, 2013 and December 31, 2012

A comparison of selected balance sheet information follows:

	At September 30, 2013				At December 31, 2012				Change
($ in thousands)	Carrying Value		% of Total Assets		Carrying Value		% of Total Assets		Carrying Value
Cash and cash equivalents	$	30,253		2%	$	60,395		4%	$	(30,142)
Securities and other investments		430,944		27		458,098		27		(27,154)
Loans receivable, net		1,073,500		68		1,079,363		65		(5,863)
Foreclosed real estate, net		12,019		1		15,923		1		(3,904)
All other assets		37,523		2		52,013		3		(14,490)
Total assets	$	1,584,239		100%	$	1,665,792		100%	$	(81,553)
Deposits	$	1,298,403		82%	$	1,362,619		82%		(64,216)
Borrowed funds and related interest payable		57,165		4		62,930		4		(5,765)
All other liabilities		36,383		2		29,296		1		7,087
Total liabilities		1,391,951		88		1,454,845		87		(62,894)
Total stockholders’ equity		192,288		12		210,947		13		(18,659)
Total liabilities and stockholders’ equity	$	1,584,239		100%	$	1,665,792		100%	$	(81,553)

Cash and Cash Equivalents

Cash and cash equivalents include interest-bearing and noninterest-bearing cash balances with banks and other short-term investments. The level of cash and cash equivalents fluctuates based on various factors, including our liquidity needs, loan demand, deposit flows, calls of securities, repayments of borrowed funds and alternative investment opportunities. See the section “Liquidity and Capital Resources” in this report for a discussion of our liquidity and funding commitments.

Securities and Other Investments

All of the investments in the table that follows were held by INB. Securities are classified as held to maturity (“HTM”) and are carried at amortized cost when INB has the intent and ability to hold them to maturity. INB invests primarily in U.S. government agency debt obligations to emphasize safety and liquidity.

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The table below sets forth information about the composition of and changes to our security and other investments.

	Balance		Activity for the Period												Balance
($ in thousands)	At Dec 31, 2012		Purchased		Matured or Redeemed		Called By Issuer		Principal Payments		Amortization (Premium) Discount		OTTI		At Sep 30, 2013
Securities held to maturity:
U.S. government agencies (1)	$	355,244	$	59,582	$	-	$	(81,173)	$	-	$	(529)	$	-	$	333,124
Residential MBS (2)		84,279		15,469		-		-		(18,379)		(1,308)		-		80,061
State and municipal		533		-		-		-		-		(1)		-		532
Corporate (3)		3,721		-		-		-		(153)		-		(964)		2,604
		443,777		75,051		-		(81,173)		(18,532)		(1,838)		(964)		416,321
Securities available for sale:
Mutual fund (4)		1,000		16		-		-		-		-		-		1,016
Other investments:
FRB and FHLB stock (5)		8,151		86		-		-		-		-		-		8,237
Time deposits with banks (6)		5,170		200		-		-		-		-		-		5,370
	$	458,098	$	75,353	$	-	$	(81,173)	$	(18,532)	$	(1,838)	$	(964)	$	430,944

(1)  Consist of investment grade debt obligations of the Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).

(2)  Consist of investment grade residential mortgage-backed securities issued by the Government National Mortgage Association (GNMA), FNMA and FHLMC.

(3)  Consist of non-investment grade corporate securities (consisting of variable-rate pooled trust preferred securities (or TRUPs) backed by obligations of companies in the banking industry). As discussed in greater detail in note 2 to the financial statements in this report, other than temporary impairment charges totaling $5.2 million have been recorded on these securities as of September 30, 2013.

(4)  Consists of shares owned in an intermediate bond fund that holds securities that are deemed to be qualified under the Community Reinvestment Act.

(5)  In order for INB to be a member of the FRB and FHLB, INB must maintain an investment in the capital stock of each entity, which amounted to $5.9 million and $2.3 million, respectively, at September 30, 2013. The FRB stock has historically paid a dividend of 6%, while the FHLB stock dividend fluctuates quarterly and was most recently at the rate of 4.00%. The total required investment fluctuates based on INB’s capital level for the FRB stock and INB’s loans and outstanding FHLB borrowings for the FHLB stock.

(6)  At September 30, 2013, time deposits with banks had a weighted-average yield of 1.12% and remaining maturity of 2.0 years.

At September 30, 2013, the HTM portfolio had a weighted-average yield to earliest call date of 1.14% and a weighted-average remaining expected life and contractual maturity of 3.3 years and 6.3 years, respectively. A large number of the securities have fixed interest rates or have predetermined rate increases and call features that allow the issuer to call the security before its stated maturity without penalty. Over the next twelve months, approximately $83 million of securities in the portfolio could potentially be called or repaid assuming market interest rates remain at or near current levels. A large portion of the resulting proceeds would then be reinvested into similar securities and potentially at lower rates. At the time of purchase, securities with callable features routinely have higher yields than non-callable securities with the same maturity. However, the callable features or the expiration of the non-callable period of the security will most likely result in the early call of securities in a declining or flat rate environment, which results in re-investment risk of the proceeds.

At September 30, 2013, the HTM portfolio’s estimated fair value was $410 million and the portfolio had a net unrealized loss of $6.0 million. For additional information concerning the HTM portfolio, see note 2 to the financial statements in this report.

Loans Receivable, Net

At September 30, 2013, our real estate loans consisted of 545 loans with an aggregate principal balance of $1.10 billion and an average loan size of $2.0 million. Loans with principal balances of more than $10 million consisted of 8 loans with an aggregate principal balance of $102 million, with the largest loan being $16.4 million. Loans with principal balances of $5 million to $10 million consisted of 41 loans and aggregated to $264 million.

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The table below sets forth information regarding our loan portfolio.

	At September 30, 2013				At December 31, 2012
($ in thousands)	# of Loans		Amount		# of Loans		Amount
Loans Secured By Real Estate:
Commercial loans		383	$	817,572		376	$	852,213
Multifamily loans		139		210,508		142		208,699
One to four family loans		19		68,662		13		41,676
Land loans		4		5,881		7		7,167
		545		1,102,623		538		1,109,755
All Other Loans:
Business loans		19		1,130		18		949
Consumer loans		14		347		12		359
		33		1,477		30		1,308
Loans receivable		578		1,104,100		568		1,111,063
Deferred loan fees				(3,823)				(3,597)
Loans receivable, net of deferred fees				1,100,277				1,107,466
Allowance for loan losses				(26,777)				(28,103)
Loans receivable, net			$	1,073,500			$	1,079,363
Loans that were on nonaccrual status				$39,517				$45,898
Loans restructured and on accrual status				11,381				20,076
Accruing loans contractually past due 90 days or more				18,403				4,391

The table below sets forth the activity in the loan portfolio for the periods indicated.

	Quarter Ended						Nine-Months Ended
($ in thousands)	Mar 31, 2013		Jun 30, 2013		Sep 30, 2013		Sep 30, 2013
Loans receivable, net, at beginning of period	$	1,079,363	$	1,053,272	$	1,029,736	$	1,079,363
Originations		61,627		62,530		96,920		221,077
Repayments and principal amortization		(85,722)		(86,759)		(52,693)		(225,174)
Transfers to foreclosed real estate		(3,040)		-		-		(3,040)
Chargeoffs		(115)		(1,823)		-		(1,938)
Recoveries		1,222		818		72		2,112
Net decrease in deferred loan fees		44		(57)		(213)		(226)
Net (increase) decrease in allowance for loan losses		(107)		1,755		(322)		1,326
Loans receivable, net, at end of period	$	1,053,272	$	1,029,736	$	1,073,500	$	1,073,500

The table below sets forth information on our new loan originations for the nine-months ended September 30, 2013.

							Weighted-Average
($ in thousands)	#of Loans (1)		Amount		% of Total		Rate		Yield (2)		Term (In Years) (3)	LTV
Commercial Real Estate:
Retail:
Shopping centers. - anchored		9	$	6,650		3.0%		4.76%		4.72%	6.8		62%��
Shopping centers - grocery anchored		1		1,638		0.7		4.38		4.61	15.0		53%
Shopping centers - unanchored		13		22,647		10.2		4.72		4.72	8.7		61%
Mixed-use commercial		13		31,395		14.2		4.00		4.18	5.6		53%
Single tenant - credit		2		2,553		1.2		4.43		4.46	10.0		70%
Single tenant - noncredit		37		59,992		27.1		4.56		4.66	8.8		63%
Office buildings		4		1,978		0.9		5.26		5.51	7.7		60%
Industrial/warehouses		4		6,950		3.2		4.54		4.63	5.2		57%
Mini-storage		4		4,966		2.2		5.02		5.20	7.5		70%
Parking lots/garages		1		500		0.2		4.08		4.36	4.9		71%
Multifamily (5 or more units):
Rent regulated apartments		3		4,600		2.1		3.70		3.89	4.0		69%
Non-rent regulated apartments		8		8,839		4.0		4.20		4.36	7.8		52%
Garden apartments		4		15,690		7.1		4.40		4.45	5.1		72%
Mixed-use multifamily		11		20,348		9.2		3.68		3.77	4.6		58%
One to four family (investor condos)		8		31,770		14.4		4.62		4.86	3.7		58%
Personal and Business		13		561		0.3		4.16		4.16	1.8		-
Totals		135	$	221,077		100%		4.40%		4.55%	6.6		61%

(1) Advances on existing loans for purposes of this table only are counted as a new loan.

(2) Computed using net origination and exit fee income as a yield adjustment.

(3) Represent contractual maturity and does not consider the impact of self-liquating loans.

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New originations in 9mths-13 were comprised of $139.3 million of commercial real estate loans, $49.5 million of multifamily loans, $31.8 million of loans made on investor owned 1-4 family condominiums and $0.6 million of personal and business loans. These loans had a weighted-average rate, term and loan-to-value ratio of 4.40%, 6.6 years and 61%, respectively. Nearly all of the loans have fixed interest rates. Loans paid off in 9mths-13 had a weighted-average rate of 5.96%.

Recent Lending Trends. Over the past several years, due to increased liquidity in the banking system and widespread increasing competition for real estate loans, particularly multifamily loans in the New York City metropolitan area, the effective loan rates for multifamily (as well as commercial real estate loans to a large extent) have been driven down substantially from historical levels, with interest rates offered as low as 3% or below for 5 to 10 year multifamily balloon products, with a portion being interest only loans. In addition to this aggressive pricing by our competitors, government agency programs have increased the attractiveness of these loans and have further fueled interest rate and term competition. Further, lower interest rates have driven up the size of these loans in relation to the value of the underlying collateral. We have also seen a shift in recent years of rental properties being converted to condominium or cooperative status which takes them out of the normal multifamily market. All of these conditions have reduced what we believe to be suitable lending opportunities for us during the past few years, particularly in the multifamily real estate market. As disclosed in our 2012 10-K, our two senior lending officers, our Chairman and INB’s President, both of whom have substantial experience in commercial and multifamily real estate lending, with oversight from INB’s Board of Directors and its Loan Committee, determine which lending opportunities are suitable for us, including setting interest rates, fees charged and maturity terms of our real estate loans. All new loans in excess of $250,000 must be first reviewed and approved by INB’s Loan Committee, which is comprised of three members of INB’s Board of Directors, one of whom is also our Chairman.

The market conditions described above have resulted in a large number of the loans we originated prior to 2010 being repaid through refinancing by other institutions. Our new loan originations, moreover, have been more weighted towards commercial real estate loans, with an emphasis on mixed-use properties and retail strip centers in the New York City metropolitan area. We have increased our lending over the last two years on loans to investors that are secured by blocks of 1-4 family individual condominium dwelling units due to attractive collateral values and yields in this market, particularly in our Florida market. We normally make these loans to investors who purchase multiple condo units that remain unsold after a condo conversion or the unsold units in a new condo development. The units are normally rented for a number of years until the economy improves and the units can be sold as originally intended. Although these loans are classified necessarily as 1-4 family as required by regulatory guidance, they are underwritten by us in accordance with our multifamily underwriting polices and their risk characteristics are essentially the same as our multifamily real estate lending. We also risk weight these loans for regulatory capital purposes at 100%. At September 30, 2013, such loans accounted for approximately 6% of our total loan portfolio compared to less than 1% at the end of 2010.

We have also increased our lending over the last two years in the single tenant non-credit and credit sectors of the commercial real estate market likewise due to attractive yields. This includes loans on real estate leased to national and regional chains of specialty restaurants, fast food establishments, retailers, drug stores and convenience stores, bank branches and some single occupancy office buildings, with a large portion of the new loans originated in states other than New York and Florida, including geographical areas that are considered secondary and tertiary markets. A significant portion of the loans secured by restaurants (which totaled approximately $42 million at September 30, 2013) are guaranteed by the franchisees that operate the business and not by the franchisor. At September 30, 2013, single tenant non-credit loans accounted for approximately 11% of our total loan portfolio, compared to approximately 2% at the end of 2010. Nearly all of the single tenants have triple net leases, whereby the tenant also pays all of the utilities, property taxes and insurance directly to the appropriate vendors and municipalities. Loans with single-tenant exposure may have greater risk of default than loans on buildings with large, diversified tenant rosters. Moreover, some of the single tenant loans in our portfolio have leases that expire before the loan matures which further increases the credit risk of these loans, although in many cases, these loans have accelerated principal amortization schedules and the leases contain renewal options. In such situations, there is always the risk that the tenant will not renew upon lease maturity, which may result in a significant amount of time and expense involved with replacing a major tenant if it were to vacate, default on its payments or we were to acquire the property through foreclosure.

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Furthermore, tenants that are not rated or are rated “non-credit” (non-credit defined as tenants with a debt rating from the major rating agencies, such as Standard and Poor’s, that is below investment grade or “BBB” for example) also pose a greater risk of default as compared to “credit rated tenants.”

The trends described above has caused our total commercial real estate loans as a percentage of our total loans to increase from 63% at the end of 2008 to 74% at September 30, 2013, while our multifamily loans, inclusive of loans on investor owned condominiums, as a percentage of total loans has decreased from 35% to 25% during the same time frame. The average yield on our entire loan portfolio has also declined from a weighted-average of 6.48% in 2008 to 5.35% in the most recent quarter ended September 30, 2013, reflecting lower market interest rates and highly competitive conditions.

Additionally, during the same time frame, as a result of competitive market conditions, lower pricing in originating loans and borrower preference for fixed-rate product, we have originated nearly all fixed-rate loans with somewhat longer maturities. Loans with fixed interest rates constituted approximately 95% of the loan portfolio at September 30, 2013. The portfolio also included loans (approximately 4% of the portfolio) that have terms that call for predetermined interest rate increases over the life of the loan, which may or may not be the same as future changes in market interest rates. Our entire loan portfolio had a weighted-average remaining life of approximately 4.5 years as of September 30, 2013, compared with 3.0 years at December 31, 2008. See the section “Asset and Liability Management” in this report as well as our 2012 10-K for a further discussion of our fixed-rate loans and their impact on our interest rate risk.

We cannot predict how long the trends or factors noted above will continue or how they will impact our loan origination volumes, loan types and loan terms over the long term. For a further discussion of the risks associated with commercial and multifamily real estate lending, see our 2012-10-K beginning on page 5.

The table below sets forth additional information regarding our real estate loan portfolio at September 30, 2013.

	New York				Florida				Other States				Total Loans						Impaired
($ in thousands)	#		Amount		#		Amount		#		Amount		#		Amount		%		Loans
Commercial Real Estate:
Retail:
Shopping centers. - anchored (1)		7	$	21,930		6	$	22,120		7	$	21,290		20	$	65,340		5.9	$	2,735
Shopping centers - grocery anchored (1)		2		18,801		1		1,283		2		6,533		5		26,617		2.4		-
Shopping centers - unanchored (1)		49		103,089		13		32,431		6		9,467		68		144,987		13.2		18,270
Mixed-use commercial (2)		73		157,703		6		15,434		4		4,409		83		177,546		16.1		500
Single tenant - credit (3)		12		11,870		5		5,668		-		-		17		17,538		1.6		-
Single tenant - noncredit (3)		33		41,058		27		33,649		33		44,976		93		119,683		10.9		514
Office buildings (4)		13		37,396		15		44,645		6		17,453		34		99,494		9.0		23,937
Industrial/warehouses (5)		15		28,983		3		3,365		-		-		18		32,348		2.9		-
Hotels (6)		10		37,257		6		29,859		-		-		16		67,116		6.1		-
Mobile home parks (7)		-		-		15		20,806		1		1,659		16		22,465		2.0		-
Mini-storage (8)		6		21,117		1		2,049		-		-		7		23,166		2.1		-
Parking lots/garages		6		21,272		-		-		-		-		6		21,272		1.9		-
Multifamily (5 or more units):
Rent regulated apartments (9)		35		54,170		-		-		-		-		35		54,170		4.9		-
Non-rent regulated apartments (9)		22		27,434		21		441		2		512		45		28,387		2.6		-
Garden apartments (10)		2		1,681		16		43,457		3		10,654		21		55,792		5.1		3,140
Mixed-use multifamily (2)		36		69,442		-		-		2		2,717		38		72,159		6.5		-
One to four family (11)		3		13,910		15		53,662		1		1,090		19		68,662		6.2		-
Land		-		-		3		4,079		1		1,802		4		5,881		0.5		1,802
Total real estate loans		324	$	667,113		153	$	312,948		68	$	122,562		545	$	1,102,623		100.0	$	50,898
Average loan balance			$	2,059			$	2,045			$	1,802			$	2,023
Loans with personal guarantees		190	$	347,409		127	$	241,044		41	$	70,178		358	$	658,631		59.7
Loans on substantially vacant properties		25	$	53,252		9	$	29,687		6	$	12,951		40	$	95,890		8.7
Loans on nonaccrual status		1	$	514		4	$	26,073		4	$	12,930		9	$	39,517		3.6

(1)  Comprised predominantly of neighborhood/community strip shopping centers containing general merchandise and convenience retailers, including grocery, drug, service, personal care, repair, discount and home improvement stores. An anchored center contains one tenant, which may be either a credit or non-credit tenant, whose percentage of the property’s total income and rentable space is 50% or greater.

(2)  Comprised of properties having both residential and commercial use, usually containing retail or commercial space on the ground floor. Mixed use loans are classified as multifamily or commercial based on the greater percentage of income from residential or commercial use.

(3)  Comprised of properties occupied by a single tenant consisting mostly of restaurants, bank branches, fast food establishments, discount retailers, drugstores, convenience stores, grocery stores, as well as local retailers and service and repair businesses. The single tenants have been further segmented by those with an investment grade rating (minimum BBB rating on its publicly traded debt), or credit tenants, and those that are either non-rated or have a less than investment grade rating, or non-credit tenants.

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Notes to preceding table continued.

  (4)  Comprised of office building properties, normally with multiple floors with multiple tenants engaged in various businesses, including medical, administrative and legal services.

  (5)  Comprised typically of commercial buildings being used for or intended to be used for the storage of goods by manufacturers, importers, exporters, wholesalers, transport businesses, etc. They are usually large buildings in industrial areas of cities and towns or villages that contain one or more tenants.

  (6)  Hotel properties in Florida are comprised of flagged hotels located in Orlando, Miami Beach, Clearwater and Tampa areas, with room counts ranging from 50 to over 200 and floors ranging from 2 to 7. Hotel properties in New York are comprised predominantly of single occupancy room hotels (commonly known as “SROs”) in New York City and Brooklyn, and several small non-flagged hotels/motels in Long Island.

  (7)  Mobile homes are often sited in land lease communities known as mobile home parks. These communities allow home owners to rent space on which to place a home, normally consisting of single or double manufactured homes. In addition to providing space, the community can provide basic utilities and other amenities.

  (8)  Mini-storage facilities, also known as self-storage, are storage space facilities leased to individuals or companies for storing various personal items or business parts or inventory. Mini-storage facilities may also provide other services in addition to rentals.

  (9)  Comprised of apartment buildings principally in the 5 boroughs of New York City consisting mostly of pre- and post-war walkup, elevator and loft buildings, including brownstones and townhouses, further segmented by those subject to rent regulations (rent control and rent stabilization).

(10)  Comprised of garden style apartments, which refer to a large development of small apartment buildings two to four stories tall where there are no internal hallways, although adjacent apartments may share a wall. Entrance to the apartments is from a common stairwell or patio, and the buildings are typically surrounded by outdoor landscaping or patios.

(11)  Comprised nearly all of investor-owned individual residential condominium dwelling units or townhouses. These loans are made primarily to investors who purchase multiple (blocks of) units/townhouses that remain unsold after a condo conversion or the unsold units in a new development. The units are normally rented (or in the process of being rented) for an extended period of time until they can be sold as originally intended. The loans are underwritten in accordance with our multifamily underwriting policies and their risk characteristics are essentially the same as our multifamily real estate lending, and we risk weight them for regulatory capital purposes the same as substantially all of the rest of our loan portfolio, or at 100%.

The table below sets forth information regarding our loans of $10 million or more at September 30, 2013.

($ in thousands)   Property Type	Property Location	Principal Balance		Current Interest Rate (1)	Maturity Date	Days Past Due	Status
Shopping ctr. - unanchored	White Plains, New York	$	16,434	4.30%	Apr 2017	None	Accrual
Hotel	Orlando, Florida		15,793	5.00%	Jan 2018	None	Accrual
Office building	Miami, Florida		14,785	5.13%	Oct 2018	None	TDR-nonaccrual (2)
Shopping ctr. - grocery anchored	Manorville, New York		11,700	4.38%	Aug 2028	None	Accrual
Hotel	New York, New York		11,168	4.00%	Dec 2016	None	Accrual
Office building	Fort Lauderdale, Florida		11,006	6.00%	May 2016	None	Accrual
Hotel	New York, New York		10,709	6.00%	Jul 2014	None	Accrual
Mix use - commercial	New York, New York		10,254	4.50%	Jul 2022	None	Accrual
		$	101,849

(1)  Rates are all fixed except for office building in Miami which has scheduled set-ups.

(2)  Loan restructured in June 2011 and has performed in accordance with its restructured terms through September 30, 2013. Current monthly payments are comprised of principal and interest payments at a 5.125% interest rate. The interest rate increases each year on June 1 (beginning on June 1, 2014), as follows to: 5.25%, 5.375%, 5.50%, 5.625% and 5.75%. Regulatory guidance requires the loan to remain on nonaccrual status as of September 30, 2013. Interest income is recognized on a cash basis.

The table below sets forth information regarding loans outstanding at September 30, 2013 by year of origination:

($ in thousands)   Year Originated (1)	Balance Outstanding		% of Total	Balance Rated Substandard		% of Outstanding	Balance Nonaccrual		% of     Outstanding
2004 and prior	$	136,333	12%	$	-	-%	$	-	-%
2005		56,594	5		4,942	9		2,283	4
2006		87,554	8		17,425	20		8,695	10
2007		138,844	13		30,896	22		27,525	19
2008		116,716	11		3,478	3		514	1
2009		89,672	8		4,450	5		-	-
2010		15,597	1		2,407	15		-	-
2011		42,710	4		-	-		-	-
2012		212,711	19		500	-		500	-
2013		207,369	19		-	-		-	-
	$	1,104,100	100%	$	64,098	6%	$	39,517	4%

(1)  Does not consider those loans that have been extended or renewed since the date of original origination.

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The table below sets forth information regarding the credit quality of the loan portfolio at September 30, 2013 based on our internally assigned ratings (as described in note 1 to the financial statements in our 2012 10-K).

($ in thousands)	Pass Rated Loans		Special Mention Rated Loans		Substandard Rated Loans		Total
Commercial real estate loans	$	743,233	$	15,183	$	59,156	$	817,572
Multifamily loans		204,994		2,374		3,140		210,508
One to four family loans		68,662		-		-		68,662
Land loans		4,079		-		1,802		5,881
Commercial business loans		1,130		-		-		1,130
Consumer loans		347		-		-		347
Total loans	$	1,022,445	$	17,557	$	64,098	$	1,104,100

The table below summarizes certain information on loans at the dates indicated.

	At September 30, 2013						At December 31, 2012
($ in thousands)	Pass Rated Loans		Substandard Rated Loans		Total		Total
Loans on nonaccrual status	$	-	$	39,517	$	39,517	$	45,898
TDRs on accruing status		5,351		6,030		11,381		20,076
Other non-impaired accruing loans (1)		-		18,551		18,551		9,240
Total (2)	$	5,351	$	64,098	$	69,449	$	75,214

(1)  Represent loans for which there were concerns at the date indicated regarding the ability of the borrowers to meet existing repayment terms. These loans reflect the distinct possibility, but not the probability, that we will not be able to collect all amounts due according to the contractual terms of the loans. These loans may never become delinquent, nonaccrual or impaired.

(2)  All of these loans are closely monitored and considered in the determination of the overall adequacy of the allowance for loan losses.

The table below sets forth the scheduled principal repayments of the loan portfolio as of September 30, 2013.

($ in thousands)	Due Within One Year		Due Over One to Five Years		Due Over Five Years		Total
Commercial real estate	$	57,654	$	440,638	$	319,280	$	817,572
Multifamily		6,375		117,924		86,209		210,508
One to four family		2,210		48,591		17,861		68,662
Land		1,802		4,079		-		5,881
Commercial business		656		209		265		1,130
Consumer		151		156		40		347
	$	68,848	$	611,597	$	423,655	$	1,104,100

For additional information concerning our loan portfolio, see note 3 to the financial statements in this report and pages 5 through 13 of our 2012 10-K.

Allowance For Loan Losses

The allowance for loan losses amounted to $26.8 million at September 30, 2013, compared to $28.1 million at December 31, 2012. The allowance represented 2.43% of total loans (net of deferred fees) outstanding at September 30, 2013, compared to 2.54% at December 31, 2012. At September 30, 2013 and December 31, 2012, the allowance for loan losses included a specific valuation allowance in the aggregate amount of $4.8 million and $5.9 million, respectively, for our impaired loans, which consist of our nonaccrual loans and accruing TDRs.

The net decrease in the allowance of $1.3 million was due to $1.9 million of chargeoffs and a $1.5 million credit for loan losses, partially offset by $2.1 million of cash recoveries of prior chargeoffs. The credit for loan losses was based on our quarterly reviews of the adequacy of the allowance for loan losses, which took into consideration, among other factors, the change in our total loans outstanding, recoveries of prior loan charge offs, the quantity and specific review of our substandard loans outstanding, and any credit rating upgrades and downgrades in the loan portfolio during the 9mths-13 period.

The charge offs for 9mths-13 were primarily comprised of $1.7 million associated with one nonaccrual loan based on management’s judgment that the estimated market value of the underlying collateral property may not be adequate to support the ultimate collection of the entire principal balance of the loan. This loan, which is on a retail property located in Waterbury, Connecticut, had an unpaid principal balance of $4.4 million and a net carrying value of $2.7 million (after the partial charge off) as of September 30, 2013. The borrower continues to make monthly payments on this loan and interest income is being recognized on a cash basis. The remaining chargeoffs of $0.2 million was comprised of $0.1 million associated with a loan transferred to foreclosed real estate and $0.1 million related to one TDR loan that was paid off at a discount to carrying value.

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At September 30, 2013, with respect to all of our impaired loans, which totaled $50.9 million, we have obtained current appraisals of the underlying collateral as follows: 6% dated within the last 3 months; 23% dated within the last 4-6 months; 52% dated within the last 7-9 months; 8% within the last 10-12 months; and 11% over 12 months. Our policy is to obtain externally prepared appraisals for all of our impaired loans that are rated substandard at least annually.

For additional information on the allowance for loan losses, including the factors we use in maintaining a specific valuation allowance for our impaired loans and our policy regarding loan chargeoffs, see note 1 to the financial statements in our 2012 10-K and note 4 to the financial statements in this report.

Asset Quality

The table below summarizes nonperforming assets, TDRs, past due loans and selected ratios at the dates indicated.

($ in thousands)	At Sep 30,      2013	At Jun 30,       2013	At Mar 31,       2013	At Dec 31,         2012
Nonaccrual loans (1):
Loans past due 90 days or more	$          514	$           -	$             -	$   5,651
Loans past due 31-89 days	-	-	500	-
TDR loans past due 31-89 days (2)	-	-	3,023	-
Loans past due 0-30 days	3,235	3,246	4,465	3,956
TDR loans past due 0-30 days (2) (3)	35,768	35,823	32,943	36,291
Total nonaccrual loans	39,517	39,069	40,931	45,898
Real estate acquired through foreclosure	12,019	14,869	18,334	15,923
Investment securities on a cash basis (4)	2,604	2,923	3,292	3,721
Total assets reported as nonperforming	$54,140	$56,861	$62,557	$65,542
TDR loans past due 90 days or more and still accruing (5)	$           -	$           -	$  2,063	$          -
TDR loans on accruing status and 0-30 days past due (5)	11,381	11,464	11,843	20,076
Loans past due 90 days or more and still accruing (6)	18,403	5,285	3,853	4,391
Loans past due 60-89 days and still accruing	3,265	11,065	-	-
Loans past due 31-59 days and still accruing	-	-	12,998	15,497
Nonaccrual loans to total gross loans	3.58%	3.69%	3.77%	4.13%
Nonperforming assets to total assets	3.42%	3.56%	3.84%	3.93%
Allowance for loan losses to total net loans	2.43%	2.50%	2.61%	2.54%
Allowance for loan losses to nonaccrual loans	67.76%	67.71%	68.92%	61.23%

(1)  We may place a loan on nonaccrual status prior to it becoming past due 90 days based on the specific facts and circumstances associated with each loan that indicate that it is probable the borrower may not be able to continue making monthly payments. Interest income from payments made on all nonaccrual loans is recognized on a cash basis (or when collected) if the outstanding principal is determined to be collectible. A loan on nonaccrual status can only be returned to accrual status if ultimate collectability of contractual principal is assured and the borrower has demonstrated satisfactory payment performance. In the case of a TDR, satisfactory payment performance can be achieved either before or after the restructuring (usually for a period of no shorter than six months).

(2)  Represent loans whose terms have been modified through the deferral of principal and/or a partial reduction in interest payments, or extension of maturity term (referred to as a TDR in this report). At September 30, 2013, $35.8 million were current as to payments and performing in accordance with their restructured terms, but are required to be classified nonaccrual for the reasons noted in footnote 1 above. One loan in the amount of $3.0 million was past due more than 31 days at March 31, 2013. This loan was subsequently paid off in June 2013.

(3)  These loans were yielding 4.57% on a weighted average basis at September 30, 2013.

(4)  See note 2 to the financial statements in this report for a discussion of these securities.

(5)  Represent modified loans as described in footnote 2 above, except that they were maintained on accrual status. All of these loans were performing and current and as of September 30, 2013, they had an aggregate weighted-average yield of approximately 5.00%.

(6)  The amount at September 30, 2013 consisted of seven loans that matured and the borrowers were making monthly loan payments. The loans were in the process of being extended as of September 30, 2013.

We have a number of nonaccrual TDR loans in the table above (which aggregated to 3 loans or $10 million at September 30, 2013) that have been partially charged-off (by a cumulative total of $5.4 million as of September 30, 2013). For these TDRs, the evaluation for full repayment of contractual principal must include the collectability of amounts charged off. Although the loans have been partially charged off for financial statement purposes, the borrowers remain obligated to pay all contractual principal due, although there can be no assurance that such charged-off amounts will ever be collected.

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The table below summarizes the change in total loans on nonaccrual status for the periods indicated.

	Quarter Ended								Nine-Months Ended
($ in thousands)	Mar 31, 2013			Jun 30, 2013			Sep 30, 2013		Sep 30, 2013
Balance at beginning of period		$45,898			$40,931			$39,069		$45,898
Net new additions		1,021			8,695			514		10,230
Principal repayments and sales		(2,833	)		(8,734	)		(66)		(11,633)
Chargeoffs		(115	)		(1,823	)		-		(1,938)
Transfers to foreclosed real estate		(3,040	)		-			-		(3,040)
Balance at end of period		$40,931			$39,069			$39,517		$39,517

The table below summarizes the change in TDRs on accrual status for the periods indicated.

	Quarter Ended						Nine-Months Ended
($ in thousands)	Mar 31, 2013		Jun 30, 2013		Sep 30, 2013		Sep 30, 2013
Balance at beginning of period		$20,076		$13,906		$11,464		$20,076
Net new additions (reductions)		464		(1,934)		-		(1,470)
Principal repayments and sales		(6,634)		(508)		(83)		(7,225)
Balance at end of period		$13,906		$11,464		$11,381		$11,381

The table below sets forth information regarding our TDRs as of September 30, 2013.

($ in thousands)   Property Type	Property Location	Contractual      Principal      Balance Due		Carrying     Value		Interest Rate	Principal Amortization	Maturity     Date	Collateral         Last         Appraised
TDRs on nonaccrual status (1)
Retail	West Palm, Florida		$ 5,549		$ 4,320	4.50%	No	Aug 2014	Mar 2013
Retail	Lake Worth, Florida		5,452		4,685	4.50%	No	Sep 2014	Mar 2013
Multifamily	Orlando, Florida		2,283		2,283	4.63%	Yes	Nov 2015	Sep 2012
Retail	Maple Heights, Ohio		4,744		1,000	4.00%	No	Apr 2017	Jan 2013
Office building	Miami, Florida		14,785		14,785	5.13%	Yes (2)	Oct 2018	Mar 2013
Office building	Norcross, Georgia		8,695		8,695	3.75%	No	Dec 2015	Apr 2013
			41,508		35,768	4.57%
TDRs on accrual status
Land	Rapid City, South Dakota		1,802		1,802	6.00%	Yes	Dec 2013	Mar 2013
Retail	New York, New York		5,351		5,351	4.50%	Yes	Mar 2014	May 2012
Multifamily	Lake Worth, Florida		857		857	6.00%	Yes	Oct 2016	Oct 2012
Retail	Monroe, New York		2,914		2,914	5.13%	Yes	Mar 2017	Aug 2013
Office Building	Clearwater, Florida		457		457	5.00%	Yes	Oct 2017	Nov 2012
			11,381		11,381	5.03%
			$52,889		$47,149	4.68%

(1)  All these TDRs were performing in accordance with their modified terms but were maintained on nonaccrual status as of September 30, 2013 in accordance with regulatory guidance. Interest income on such loans is recognized on a cash basis. The carrying value for these loans represents contractual unpaid principal balance less any partial principal chargeoffs (totaling $5.4 million) and interest received and applied as a reduction of principal (totaling $0.3 million). The borrowers remain obligated to pay all contractual amounts due.

(2)  Current monthly payments are comprised of principal and interest payments at a 5.125% interest rate. The interest rate increases each year on June 1 (beginning on June 1, 2014), as follows to: 5.25%, 5.375%, 5.50%, 5.625% and 5.75%. Regulatory guidance requires the loan to remain on nonaccrual status as of September 30, 2013. Interest income is recognized on a cash basis.

The table below details real estate we owned through foreclosure at the dates indicated.

($ in thousands)				Net Carrying Value (1)								Last
Description of Property	City	State	Acquired	Sep 30,     2013		Jun 30, 2013		Mar 31, 2013		Dec 31,     2012		Appraised
7 story vacant office building and vacant lot	Yonkers	NY	8/09		$  1,334		$  1,334		$  1,334		$  1,334	May 2013
146 unit garden apartment complex - 75% occupied (2)	Austell	GA	9/09		-		1,600		1,750		2,000	Oct 2012
39 acres of vacant land partially waterfront (3)	Perryville	MD	4/10		-		1,000		1,000		1,133	Dec 2012
622 unit garden apartment complex - 82% occupied	Louisville	KY	7/10		6,685		6,685		6,685		6,685	May 2013
192 unit garden apartment complex - 93% occupied (4)	Louisville	KY	7/10		-		-		3,315		3,315	May 2013
27,000 sq. foot industrial warehouse - 65% occupied	Sunrise	FL	9/12		1,200		1,400		1,400		1,456	May 2013
Two, 5 story vacant office buildings-182,000 sq. feet	Jacksonville	FL	2/13		2,800		2,850		2,850		-	Mar 2013
					$12,019		$14,869		$18,334	$	15,923

(1)  Reported net of any valuation allowance that has been recorded due to decreases in the estimated fair value of the property subsequent to the date of foreclosure. See note 5 to the financial statements in this report for the activity in the valuation allowance.

(2)  Property sold in Q3-13 for net proceeds of $1.5 million. Property’s original cost basis upon transfer to real estate owned was $4.8 million. A net loss from the sale of this property in the amount $0.1 million was recorded in Q3-13.

(3)  Property sold in Q3-13 for net proceeds of $1.2 million. Property’s original cost basis upon transfer to real estate owned was $2.0 million. A net gain from the sale of this property in the amount $0.2 million was recorded in Q3-13.

(4)  Property sold in Q2-13 for net proceeds of $4.1 million. Property’s original cost basis upon transfer to real estate owned was $3.4 million. A net gain from the sale of this property in the amount $0.7 million was recorded in Q2-13.

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We review the estimated fair value of our portfolio of real estate owned through foreclosure at least quarterly by performing market valuations of the properties, which normally consist of obtaining externally prepared appraisals at least annually for every property, as well as performing quarterly reviews of economic and real estate market conditions in the local area where the property is located, including taking into consideration discussions with real estate brokers and interested buyers, in order to determine if a valuation allowance is needed to reflect any decrease in the estimated fair value of the property since acquisition. All of the properties owned at September 30, 2013 were being marketed for sale.

The table below summarizes the change in foreclosed real estate for the periods indicated.

	Quarter Ended					Nine-Months Ended
($ in thousands)		Mar 31, 2013	Jun 30, 2013	Sep 30, 2013			Sep 30, 2013
Balance at beginning of period		$15,923	$18,334	$14,869			$15,923
Transfers from loan portfolio		3,040	-	-			3,040
Writedowns to carrying values subsequent to foreclosure (1)		(629)	(150)	(250	)		(1,029)
Sales		-	(4,107)	(2,702	)		(6,809)
Recoveries of prior writedowns (1)		-	74	-			74
Gain (loss) on sales, net		-	718	102			820
Balance at end of period		$18,334	$14,869	$12,019			$12,019

(1)  Recorded as an (increase) decrease to the valuation allowance for real estate owned through the provision for real estate losses.

For additional information on nonaccrual loans, TDRs, past due loans and real estate owned and its corresponding valuation allowance, see notes 3 and 5 to the financial statements in this report.

All Other Assets

All other assets decreased $14.5 million from December 31, 2012, primarily due to a $7.5 million decrease in our deferred tax asset (resulting from the partial utilization of the asset to offset our taxable earnings) and a $6.1 million reduction in prepaid FDIC insurance premiums (resulting from a cash refund from the FDIC of unused premiums). See note 11 to the financial statements in this report for additional information on the deferred tax asset.

With respect to FDIC premiums, on December 31, 2009, insured depository institutions were required to prepay three years of estimated premiums. INB prepaid a total of $15.8 million of premiums on December 31, 2009. This amount was recorded as a prepaid asset at that time and was charged to expense accordingly during the periods to which it related (based on actual premiums assessed by the FDIC). The remaining unused premium was refunded to all depository institutions in June 2013 and INB received its unused portion of $5.6 million on June 28, 2013.

Deposits

Deposits decreased $64 million from December 31, 2012, primarily reflecting a decrease of $39 million in certificate of deposit accounts (CDs) and $25 million in money market deposit accounts.

At September 30, 2013, CDs totaled $897 million, and checking, savings and money market accounts aggregated to $401 million. The same categories of deposit accounts totaled $937 million and $426 million, respectively, at December 31, 2012. CDs represented 69% of total deposits at September 30, 2013 and December 31, 2012. At September 30, 2013 and December 31, 2012, CDs included $85 million and $78 million of brokered deposits, respectively. For additional information on deposits, see the section “Liquidity and Capital Resources” and note 6 to the financial statements in this report.

Borrowed Funds and Related Interest Payable

Borrowed funds and related accrued interest payable decreased $5.8 million from December 31, 2012 due to the payment in Q2-13 of accrued interest. For additional information on and discussion of borrowed funds, see notes 7 and 8 to the financial statements in this report, as well as the section entitled “Liquidity and Capital Resources.”

All Other Liabilities

All other liabilities increased $7.1 million from December 31, 2012 due to higher level of mortgage escrow funds payable ($9.3 million), partially offset by lower level of official checks outstanding ($1.8 million). Mortgage escrow funds payable fluctuate based on the level of loans outstanding and other factors and represent advance payments made to us by borrowers for property taxes and insurance that we remit to third parties when due. Official checks outstanding represent checks issued by INB in the normal course of business which fluctuate based on banking activity.

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Stockholders’ Equity

The following table details the changes in stockholders’ equity:

($ in thousands, except per share amounts)	Amount	Shares	Amount Per Share
Common stockholders’ equity at December 31, 2012	$186,323	21,589,589	$8.63
Net earnings before preferred dividend requirements	10,287	-	0.47
Amortization of preferred stock discount	(376)	-	(0.02)
Discount from redemption of preferred stock	187	-	0.01
Preferred dividends declared and paid (1)	(5,068)	-	(0.23)
Issuance of common stock from option exercises (2)	54	14,967	3.59
Issuance of restricted common stock (2)	-	330,700	-
Forfeiture of restricted common stock (2)	-	(18,633)	-
Compensation from common stock options and restricted common stock (2)	731	-	0.03
Excess tax benefit on vested restricted stock/exercise of stock options (2)	150	-	0.01
Common stockholders’ equity at September 30, 2013	$192,288	21,916,623	$8.77
Preferred stockholder’s equity at December 31, 2012	$  24,624	25,000
Amortization of preferred stock discount	376	-
Redemption of preferred stock (1)	(24,813)	(25,000)
Discount from redemption of preferred stock (1)	(187)	-
Preferred stockholder’s equity at September 30, 2013	$            -	-
Total stockholders’ equity at September 30, 2013	$192,288

       (1) See note 9 to the financial statements in this report.

       (2) See note 10 to the financial statements in this report.

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Comparison of Results of Operations for the Quarters Ended September 30, 2013 and 2012

Selected information regarding our results of operations follows:

	For the Quarter Ended Sep 30,
($ in thousands)		2013	2012	Change
Interest and dividend income		$15,624	$19,082	$ (3,458)
Interest expense		6,794	9,223	(2,429)
Net interest and dividend income		8,830	9,859	(1,029)
Provision for loan losses		250	-	250
Noninterest income		901	1,187	(286)
Noninterest expenses:
Provision for real estate losses		250	1,025	(775)
Real estate activities (income) expense, net		212	883	(671)
Operating expenses		3,862	4,160	(298)
Earnings before provision for income taxes		5,157	4,978	179
Provision for income taxes		2,300	2,300	-
Net earnings		2,857	2,678	179
Preferred dividend requirements and discount amortization (1)		269	453	(184)
Net earnings available to common stockholders		$ 2,588	$ 2,225	$   363
Diluted earnings per common share		$   0.12	$   0.10	$  0.02

(1) Represents dividend requirements on cumulative preferred stock and amortization of related preferred stock discount. See note 9 to the financial statements in this report.

Net Interest and Dividend Income

Net interest and dividend income is our primary source of earnings and is influenced by the amount, distribution and repricing characteristics of our interest-earning assets and interest-bearing liabilities, as well as by the relative levels and movements of interest rates. Net interest and dividend income is the difference between interest income earned on our interest-earning assets, such as loans and securities, and interest expense paid on our interest-bearing liabilities, such as deposits and borrowings.

Net interest and dividend income (detailed in the table that follows) decreased by $1.0 million to $8.8 million in Q3-13 from $9.8 million in Q3-12. The decrease was primarily due to a reduction in INB’s assets. A large part of the reduction was planned in order to increase INB’s capital ratios.

In Q3-13, total average interest-earning assets decreased by $183 million from Q3-12, reflecting decreases of $84 million in loans and $99 million in total securities and overnight investments. At the same time, average deposits and borrowed funds decreased by $215 million and $10 million, respectively, while average stockholders’ equity decreased by $4 million. The smaller balance sheet contributed to a significant increase in INB’s regulatory capital ratios (prior to a total of $31 million of cash dividends paid to IBC (in June and August 2013) to fund the redemption of TARP securities), but negatively impacted total net interest and dividend income.

Our net interest margin was 2.32% in Q3-13, unchanged from Q3-12, as the benefit of a higher ratio of interest-earning assets to interest-bearing liabilities (or a $42 million increase in net interest-earning assets) was offset by a 5 basis point decrease in our interest rate spread. The lower spread was due to payoffs of higher yielding loans and calls of security investments, coupled with the re-investment of a large portion of these cash inflows into new loans and securities at significantly lower market interest rates, largely offset by lower rates paid on deposits and the run-off of higher-cost CDs and borrowings. Overall, the average yield on earning assets decreased by 38 basis points to 4.10% in Q3-13, from 4.48% in Q3-12, while the average cost of funds decreased by 33 basis points to 2.02% in Q3-13, from 2.35% in Q3-12.

The following table provides information on our: average assets, liabilities and stockholders’ equity; yields earned on interest-earning assets; and rates paid on interest-bearing liabilities for the periods indicated. The yields and rates shown are based on a computation of income/expense (including any related fee income or expense) for each period divided by average interest-earning assets/interest-bearing liabilities during each period. Average balances are derived from daily balances. Net interest margin is computed by dividing net interest and dividend income by the average of total interest-earning assets during each period. The interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin is greater than the interest rate spread due to the additional income earned on those assets funded by non-interest-bearing liabilities, primarily demand deposits, and stockholders’ equity.

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	For the Quarter Ended
	September 30, 2013						September 30, 2012
($ in thousands)	Average       Balance		Interest      Inc./Exp.		Yield/     Rate (2)		Average       Balance		Interest      Inc./Exp.		Yield/   Rate (2)
Interest-earning assets:
Commercial real estate loans	$	802,633		$10,906		5.39%	$	870,223		$13,063		5.97%
Multifamily loans		203,430		2,545		4.96		256,726		3,756		5.82
One to four family loans		64,115		932		5.77		23,718		346		5.80
Land loans		5,911		84		5.64		9,510		162		6.78
All other loans		1,489		19		5.06		1,861		24		5.13
Total loans (1)		1,077,578		14,486		5.35		1,162,038		17,351		5.94
U.S. government agencies securities		334,443		746		0.88		417,780		1,300		1.24
Residential mortgage-backed securities		75,139		256		1.35		92,897		281		1.20
State and municipal securities		532		2		1.49		534		2		1.49
Corporate securities (1)		2,871		-		-		4,221		17		1.60
Mutual funds and other equity securities		1,014		5		1.96		-		-		-
FRB and FHLB stock		8,235		112		5.40		8,568		119		5.53
Total securities		422,234		1,121		1.05		524,000		$1,719		1.31%
Other interest-earning assets		11,027		17		0.61		7,987		12		0.60%
Total interest-earning assets		1,510,839		$15,624		4.10%	$	1,694,025		19,082		4.48%
Noninterest-earning assets		66,375						120,859
Total assets	$	1,577,214					$	1,814,884
Interest-bearing liabilities:
Interest checking deposits	$	16,197		$      17		0.42%	$	13,387		$     15		0.45%
Savings deposits		9,656		7		0.29		9,298		7		0.30
Money market deposits		371,166		380		0.41		422,297		459		0.43
Certificates of deposit		881,848		5,988		2.69		1,049,265		8,173		3.10
Total deposit accounts		1,278,867		6,392		1.98		1,494,247		8,654		2.30
FHLB advances		-		-		-		9,511		103		4.31
Debentures - capital securities		56,702		402		2.81		56,702		466		3.27
Total borrowed funds		56,702		402		2.81		66,213		569		3.42
Total interest-bearing liabilities	$	1,335,569		$ 6,794		2.02%	$	1,560,460		$9,223		2.35%
Noninterest-bearing deposits		5,486						4,719
Noninterest-bearing liabilities		34,758						44,499
Total liabilities		1,375,813						1,609,678
Preferred stockholder’s equity		9,113						24,464
Common stockholders’ equity		192,288						180,742
Total stockholders’ equity		201,401						205,206
Total liabilities and stockholders’ equity	$	1,577,214					$	1,814,884
Net interest and dividend income/spread				$ 8,830		2.08%				$  9,859		2.13%
Net interest-earning assets/margin (3)	$	175,270				2.32%	$	133,565				2.32%
Ratio of total interest-earning assets to total interest-bearing liabilities		1.13						1.09
Return on average assets (2)		0.72%						0.59%
Return on average common equity (2)		5.94%						5.93%
Return on total average equity (2)		5.67%						5.22%
Noninterest expense to average assets (2) (5)		0.98%						0.92%
Efficiency ratio (4)		40%						38%
Average stockholders’ equity to average assets		12.77%						11.31%

(1)  Includes average nonaccrual loans of $39.0 million in the 2013 period versus $49.6 million in the 2012 period. Total interest income not accrued on such loans and excluded from the table totaled $42,000 in the 2013 period and $153,000 in the 2012 period. Interest income on corporate securities is also recognized on cash basis. Payments received in the 2013 period were applied as a reduction of our principal investment. See note 2 to the financial statements in this report.

(2)  Annualized.

(3)  Net interest margin is reported exclusive of income from loan prepayments, which is included as a component of our noninterest income.

Inclusive of income from loan prepayments, the margin would compute to 2.48% and 2.49% for the 2013 and 2012 period, respectively.

(4)  Defined as noninterest expenses (excluding the provisions for loan and real estate losses and real estate activities (income) expense, net) as a percentage of net interest and dividend income plus noninterest income.

(5)  Noninterest expenses for this ratio exclude real estate activities (income) expense, net.

The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).

43

	For the Quarter Ended Sep 30, 2013 versus Sep 30, 2012
	Increase (Decrease) Due To Change In:
($ in thousands)		Rate	Volume	Rate/Volume	Total
Interest-earning assets:
Total loans		$(1,843)	$(1,264)	$ 242	$ (2,865)
Total securities		(361)	(321)	84	(598)
Total other interest-earning assets		-	5	-	5
Total interest-earning assets		(2,204)	(1,580)	326	(3,458)
Interest-bearing liabilities:
Interest checking deposits		(1)	3	-	2
Savings deposits		-	-	-	-
Money market deposits		(21)	(55)	(3)	(79)
Certificates of deposit		(1,075)	(1,297)	187	(2,185)
Total deposit accounts		(1,097)	(1,349)	184	(2,262)
Total borrowed funds		(167)	(102)	102	(167)
Total interest-bearing liabilities		(1,264)	(1,451)	286	(2,429)
Net change in interest and dividend income		$(940)	$   (129)	$   40	$ (1,029)

Provision for Loan Losses

We determine the need for a provision or (credit) for loan losses based on our quarterly review of the adequacy of the allowance for loan losses. A more detailed discussion of the factors and estimates we use in determining the adequacy of the allowance for loan losses can be found under the caption “Critical Accounting Policies” on pages 44 to 47 in our 2012 10-K. For Q3-13, our provision for loan losses was $0.3 million, compared to no credit or provision for loan losses in Q3-12. The increase was driven primarily by growth in the loan portfolio during Q3-13 of approximately $44 million as well as the assessment of the factors we use in determining the adequacy of the allowance.

Noninterest Income

Noninterest income decreased to $0.9 million in Q3-13 from $1.2 million in Q3-12, due to a $0.1 million decrease in income from loan prepayments and a $0.3 million increase in security impairment charges, partially offset by a $0.1 million increase in other lending fees. Loan prepayment income consists of the full recognition of any unearned fees associated with such loans at the time of payoff and the receipt of prepayment penalties and interest in certain cases. See note 2 to the financial statements in this report for a discussion of security impairment charges, which are based on various factors, including estimates made by us.

Noninterest Expenses

The provision for real estate losses decreased to $0.2 million in Q3-13, from $1.0 million Q3-12. The decrease reflected fewer write-downs in the carrying value of real estate owned. See the section entitled “Asset Quality,” for a list of all real estate owned, related information thereon and the factors we use in determining the provision for real estate losses.

Real estate activities expense, net of rental and other income, decreased to $0.2 million in Q3-13 from $0.9 million in Q3-12, reflecting a lower level of real estate owned through foreclosure. Real estate activities (income) expense, net is comprised of expenditures we make for real estate taxes, insurance, utilities repairs, maintenance, legal services and other charges (net of any rental income earned from the operation of the property or gains from the sale or foreclosure of the property) that are required in protecting our interest in real estate acquired through foreclosure and various properties collateralizing our nonaccrual loans.

Operating expenses decreased to $3.9 million in Q3-13 from $4.2 million in Q3-12, primarily due to a $0.3 million decrease in FDIC insurance expense resulting from a smaller assessment base and an upgrade in INB’s FDIC assessment rating. We employed 78 people as of September 30, 2013, compared to 77 employees at September 30, 2012.

Provision for Income Taxes

The provision for income tax expense amounted to $2.3 million in both Q3-13 and Q3-12. Nearly all of the expense for both periods reflected the partial utilization of our deferred tax asset. For information on the deferred tax asset, see note 11 to the financial statements in this report. Our effective income tax rate (inclusive of state and local taxes) was approximately 45% in Q3-13 and 46% in Q3-12.

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Comparison of Results of Operations for the Nine-Months Ended September 30, 2013 and 2012

Selected information regarding our results of operations follows:

	For the Nine-Months Ended Sep 30,
($ in thousands)		2013	2012	Change
Interest and dividend income		$47,496	$59,486	$ (11,990)
Interest expense		21,087	29,964	(8,877)
Net interest and dividend income		26,409	29,522	(3,113)
Credit for loan losses		(1,500)	-	(1,500)
Noninterest income		2,346	3,718	(1,372)
Noninterest expenses:
Provision for real estate losses		955	2,933	(1,978)
Real estate activities (income) expense, net		(1,120)	1,822	(2,942)
Operating expenses		11,954	12,473	(519)
Earnings before provision for income taxes		18,466	16,012	2,454
Provision for income taxes		8,179	7,320	859
Net earnings		10,287	8,692	1,595
Preferred dividend requirements and discount amortization (1)		1,057	1,345	(288)
Net earnings available to common stockholders		$ 9,230	$ 7,347	$ 1,883
Diluted earnings per common share		$   0.42	$   0.34	$   0.08

(1) Represents dividend requirements on cumulative preferred stock and amortization of related preferred stock discount. See note 9 to the financial statements in this report.

Net Interest and Dividend Income

As described in greater detail in the section entitled “Comparison of Results of Operations for the Quarters Ended September 30, 2013 and 2012” under the caption “Net Interest and Dividend Income,” net interest and dividend income is our primary source of earnings.

In 9mths-13, net interest and dividend income (detailed in the table that follows) decreased by $3.1 million from 9mths-12. The decrease was also due to a smaller balance sheet, partially offset by an improved net interest margin during the period.

Our total average interest-earning assets decreased by $250 million from 9mths-12, reflecting an $84 million decrease in average loans and a $166 million net decrease in average security and overnight investments. At the same time, average deposits and borrowed funds decreased by $265 million and $11 million, respectively, while average stockholders’ equity increased by $8 million.

Our net interest margin improved to 2.33% in 9mths-13 from 2.23% in 9mths-12. The margin increased by 10 basis points, reflecting an 6 basis point improvement in our interest rate spread and a higher ratio of interest-earning assets to interest-bearing liabilities (from 1.08 to 1.12), or a $26 million increase in net interest-earning assets. Overall, our average cost of funds decreased by 37 basis points to 2.08% in 9mths-13, from 2.45% in 9mths-12, while our average yield on earning assets decreased at a slower pace by 31 basis points to 4.19% in 9mths-13, from 4.50% in 9mths-12.

The reasons for the changes in the average yield and cost of funds are the same as those discussed in the comparison of quarterly operating results.

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The following table provides information for the periods indicated, the contents of which are described above in a similar table in the section entitled “Comparison of Results of Operations for the Quarters Ended September 30, 2013 and 2012” under the caption “Net Interest and Dividend Income.”

	For the Nine-Months Ended
	September 30, 2013				September 30, 2012
($ in thousands)		Average       Balance	Interest     Inc./Exp.	Yield/   Rate (2)		Average       Balance	Interest     Inc./Exp.	Yield/   Rate (2)
Interest-earning assets:
Commercial real estate loans		$  808,914	$33,491	5.54%		$   868,936	$39,992	6.15%
Multifamily loans		203,899	7,884	5.17		262,934	11,799	5.99
One to four family loans		58,002	2,529	5.83		17,916	797	5.94
Land loans		6,238	269	5.77		10,552	542	6.86
All other loans		1,430	57	5.33		1,886	72	5.10
Total loans (1)		1,078,483	44,230	5.50		1,162,224	53,202	6.11
U.S. government agencies securities		335,834	2,204	0.88		529,327	5,319	1.34
Residential mortgage-backed securities		77,322	650	1.12		52,863	509	1.29
State and municipal securities		533	5	1.25		238	2	1.12
Corporate securities (1)		3,250	-	-		4,272	52	1.63
Mutual funds and other equity securities		1,009	16	2.12		-	-	-
FRB and FHLB stock		8,205	338	5.51		8,755	373	5.69
Total securities		426,153	3,213	1.01		595,455	$6,255	1.40%
Other interest-earning assets		11,080	53	0.64		7,576	29	0.51%
Total interest-earning assets		1,515,716	$47,496	4.19%		$1,765,255	$59,486	4.50%
Noninterest-earning assets		93,807				117,059
Total assets		$1,609,523				$1,882,314
Interest-bearing liabilities:
Interest checking deposits		$     15,331	$       47	0.41%		$     12,828	$      51	0.53%
Savings deposits		9,652	22	0.30		9,235	27	0.39
Money market deposits		378,366	1,149	0.41		430,322	1,723	0.53
Certificates of deposit		897,116	18,592	2.77		1,112,883	26,413	3.17
Total deposit accounts		1,300,465	19,810	2.04		1,565,268	28,214	2.41
FHLB advances		-	-	-		11,216	358	4.26
Debentures - capital securities		56,702	1,277	3.01		56,702	1,392	3.28
Total borrowed funds		56,702	1,277	3.01		67,918	1,750	3.44
Total interest-bearing liabilities		$1,357,167	$ 21,087	2.08%		$1,633,186	$29,964	2.45%
Noninterest-bearing deposits		5,199				4,525
Noninterest-bearing liabilities		37,310				42,650
Total liabilities		1,399,676				1,680,361
Preferred stockholder’s equity		19,292				24,371
Common stockholders’ equity		190,555				177,582
Total stockholders’ equity		209,847				201,953
Total liabilities and stockholders’ equity		$1,609,523				$1,882,314
Net interest and dividend income/spread			$ 26,409	2.11%			$29,522	2.05%
Net interest-earning assets/margin (3)		$   158,549		2.33%		$   132,069		2.23%
Ratio of total interest-earning assets to total interest-bearing liabilities		1.12				1.08
Return on average assets (2)		0.85%				0.62%
Return on average common equity (2)		7.20%				6.53%
Return on total average equity (2)		6.54%				5.74%
Noninterest expense to average assets (2) (5)		0.99%				0.88%
Efficiency ratio (4)		42%				38%
Average stockholders’ equity to average assets		13.04%				10.73%

(1)  Includes average nonaccrual loans of $41.0 million in the 2013 period versus $53.9 million in the 2012 period. Total interest income not accrued on such loans and excluded from the table totaled $0.1 million in the 2013 period and $0.4 million in the 2012 period. Interest income on corporate securities is also recognized on cash basis. Payments received in the 2013 period were applied as a reduction of our principal investment. See note 2 to the financial statements in this report.

(2)  Annualized.

(3)  Net interest margin is reported exclusive of income from loan prepayments, which is included as a component of our noninterest income.

Inclusive of income from loan prepayments, the margin would compute to 2.50% and 2.44% for the 2013 and 2012 period, respectively.

(4)  Defined as noninterest expenses (excluding the provisions for loan and real estate losses and real estate activities (income) expense, net) as a percentage of net interest and dividend income plus noninterest income.

(5)  Noninterest expenses for this ratio exclude real estate activities (income) expense, net.

46

The following table provides information regarding changes in interest and dividend income and interest expense. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).

	For the Nine-Months Ended Sep 30, 2013 versus Sep 30, 2012
	Increase (Decrease) Due To Change In:
($ in thousands)		Rate	Volume	Rate/Volume	Total
Interest-earning assets:
Total loans		$(5,690)	$(3,874)	$ 592	$ (8,972)
Total securities		(1,957)	(1,741)	656	(3,042)
Total other interest-earning assets		7	13	4	24
Total interest-earning assets		(7,640)	(5,602)	1,252	(11,990)
Interest-bearing liabilities:
Interest checking deposits		(12)	10	(2)	(4)
Savings deposits		(6)	1	-	(5)
Money market deposits		(387)	(207)	20	(574)
Certificates of deposit		(3,339)	(5,130)	648	(7,821)
Total deposit accounts		(3,744)	(5,326)	666	(8,404)
Total borrowed funds		(473)	(358)	358	(473)
Total interest-bearing liabilities		(4,217)	(5,684)	1,024	(8,877)
Net change in interest and dividend income		$(3,423)	$    82	$228	$ (3,113)

Provision for Loan Losses

We determine the need for a provision or (credit) for loan losses based on our quarterly review of the adequacy of the allowance for loan losses. A more detailed discussion of the factors and estimates we use in determining the adequacy of the allowance for loan losses can be found under the caption “Critical Accounting Policies” on pages 44 to 47 in our 2012 10-K. For 9mths-13, our review resulted in a credit for loan losses of $1.5 million, compared to no credit or provision for loan losses in 9mths-12. The credit was primarily a function of partial cash recoveries of prior loan charge offs during the first and second quarters of 2013, partially offset by the impact of an increase in our loan portfolio during Q3-13. See note 14 to the financial statements in this report for a discussion on the cash recoveries.

Noninterest Income

Noninterest income decreased to $2.3 million in 9mths-13 from $3.7 million in 9mths-12, primarily due to a $0.5 million net decrease in income from loan prepayments and other lending fees, and a $0.8 million increase in security impairment charges. Loan prepayment income consists of the full recognition of any unearned fees associated with such loans at the time of payoff and the receipt of prepayment penalties and interest in certain cases. See note 2 to the financial statements in this report for a discussion of security impairment charges, which are based on various factors, including estimates made by us.

Noninterest Expenses

The provision for real estate losses decreased to $0.9 million in 9mths-13 from $2.9 million in 9mths-12. The decrease reflected fewer write-downs in the carrying value of real estate owned. See the section entitled “Asset Quality,” for a list of all real estate owned and related information thereon, and a discussion of the factors we use in determining the provision for real estate losses.

Real estate activities expense, net of rental and other income, totaled $1.8 million in 9mths-12. For 9mths-13, these activities produced net income of $1.1 million, largely due to $0.8 million of gains from the sale of three properties and $1.6 million of cash recoveries of expenses associated with previously owned properties. Exclusive of these income items, net real estate expenses would have been $1.3 million in 9mths-13, or $0.5 million less from the same prior year period due to a lower level of real estate owned through foreclosure.

Operating expenses decreased to $12.0 million in 9mths-13 from $12.5 million in 9mths-12, reflecting a $0.7 million decrease in FDIC deposit insurance expense, partially offset by a $0.1 million aggregate increase in salaries, benefits and stock compensation expense. The decrease in FDIC insurance expense was due to a smaller balance sheet and an improved FDIC risk assessment rating. We employed 78 people as of September 30, 2013, versus 77 at September 30, 2012. For additional information on our stock compensation, see note 10 to the financial statements in this report.

47

Provision for Income Taxes

The provision for income tax expense increased to $8.2 million in 9mths-13 from 7.3 million in 9mths-12 due to higher pre-tax income. Nearly all of the expense for both periods reflected the partial utilization of our deferred tax asset. For information on the deferred tax asset, see note 11 to the financial statements in this report. Our effective income tax rate (inclusive of state and local taxes) was approximately 44% in 9mths-13 and 46% in 9mths-12.

Off-Balance Sheet and Other Financing Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financing needs of our customers. For a further information on and discussion of these instruments, see note 13 to the financial statements in this report.

Liquidity and Capital Resources

General

The following discussion serves as an update to the section entitled “Liquidity and Capital Resources,” which begins on page 64 of our 2012 10-K, and should be read in conjunction with that discussion. For detail concerning our actual cash flows for the nine-months ended September 30, 2013, see the condensed consolidated statements of cash flows in this report.

Intervest National Bank

On March 21, 2013, INB’s primary regulator, the OCC, terminated its Formal Agreement with INB and INB is no longer subject to the related operating restrictions that had been in effect since December 2009. Among other things, effective March 21, 2013, INB is no longer required to maintain its deposit pricing at or below the national rates published by the FDIC, plus 75 basis points. INB is also no longer prohibited from accepting, renewing or rolling over brokered deposits, and is no longer subject to heightened regulatory capital requirements.

At September 30, 2013, INB had cash and short-term investments totaling $29 million and approved commitments to lend of $31 million (which excludes an additional $50 million of potential new loan commitments that were in process as of that date), most of which are anticipated to be funded over the next 12 months from cash on hand.

At September 30, 2013, total consolidated deposits amounted to $1.30 billion, consisting of certificate of deposit accounts (CDs) totaling $897 million, and checking, savings and money market accounts aggregating to $401 million. CDs represented 69% of total deposits and CDs of $100,000 or more totaled $467 million and included $85 million of brokered deposits. Brokered deposits had a weighted-average remaining term and stated interest rate of 2.8 years and 3.48%, respectively, at September 30, 2013, and $32 million (with a weighted-average rate of 4.76%) mature by September 30, 2014. At September 30, 2013, $434 million, or 48% of total CDs (inclusive of brokered deposits), mature within one year.

In the nine months of 2013, INB experienced net deposit outflow of $64 million, consisting of the repayment of $29 million of maturing brokered CD deposits and net reductions of $45 million in CDs and $25 million in total money market and checking deposit accounts, partially offset by $35 million of new brokered CD deposits. INB funded this net outflow through a portion of the cash flows from the principal repayments of loans and calls of its security investments. INB’s current objective is to maintain its deposit rates at competitive levels in order to promote a stable deposit base that can be adjusted as needed to meet its cash flow needs. INB has historically targeted its loan-to-deposit ratio in a range from 75% to 85%. This ratio stood at 80% as of September 30, 2013.

At September 30, 2013, $139 million, or 13%, of INB’s loan portfolio (excluding nonaccrual loans) was scheduled to mature within one year. INB expects to extend or refinance a portion of these maturing loans. Additionally, over the next twelve months, approximately $83 million of INB’s security investments could potentially be called or repaid if interest rates remain at or near current levels. Absent an alternative need for these cash inflows, a large portion is expected to be reinvested into new loans or similar securities, with potentially lower market rates.

At September 30, 2013, INB had no borrowed funds outstanding. At September 30, 2013, INB had available collateral consisting of investment securities and certain loans that could be pledged to support $441 million in aggregate borrowings from the FHLB and FRB. INB also had access to overnight unsecured lines of credit from two banks totaling $24 million. However, these two lines are cancelable by the lenders at any time.

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This total borrowing capacity of $465 million at September 30, 2013 represented a decrease of $47 million from December 31, 2012, primarily due to a lower level of security investments outstanding. At September 30, 2013, INB’s secured lines of credit represented 55% of INB’s total money-market deposit accounts and all CDs maturing within one year.

INB has historically paid cash dividends to IBC to fund IBC’s debt service requirements on its outstanding debt as well as the payment of any dividends on IBC’s capital stock. From January 2010 through March 21, 2013, as required by the OCC, INB suspended the declaration and payment of dividends to IBC in order to preserve capital. In June 2013 and August 2013, INB, with regulatory approval from the OCC, paid cash dividends in the amount of $12.25 million and $18.75 million, respectively, to IBC in order to fund IBC’s redemption of Preferred Stock as described below under the caption “Intervest Bancshares Corporation”.

As discussed in note 15 to the financial statements in this report, at September 30, 2013, INB’s regulatory capital ratios were well in excess of those required to be considered a well-capitalized institution. INB does not expect to need additional capital over the next twelve months.

INB’s current dividend policy is to pay dividends at levels consistent with maintaining its desired liquidity and capital ratios and debt servicing obligations. Under the National Bank Act and the OCC regulations, INB’s board of directors may declare dividends to be paid out of INB’s undivided profits. No dividend may be paid by INB without the OCC’s approval if the total amount of all dividends, including the then proposed dividend, declared by INB in any calendar year exceeds INB’s total retained net income for that year, combined with its retained net income for the preceding two years. Also, INB may not declare or pay any dividends if, after making the dividend, INB would be “undercapitalized” and no dividend may be paid by INB if it is in default with respect to any deposit insurance assessment due to the FDIC. See the discussion below regarding IBC’s regulatory restrictions with respect to accepting dividends from INB.

Intervest Bancshares Corporation

From February 2010 through May 2013, as required by its primary regulator, the FRB, IBC suspended the declaration and payment of dividends on its capital stock and the payment of interest on its outstanding debt.

In June and August 2013, with all the necessary approvals from the FRB, IBC accepted cash dividend payments of $12.25 million and $18.75 million, respectively, from INB and used those funds, along with a portion of IBC’s cash on hand, to pay accrued interest on its outstanding debt and to purchase and retire its Preferred Stock through two separate transactions. See notes 8 and 9 to the financial statements in this report for discussions regarding (i) IBC’s successful bid and repurchase on June 24, 2013 of 6,250 of its 25,000 shares of then outstanding Preferred Stock, as well as the payment of accrued interest payable on its outstanding debt and (ii) IBC’s redemption on August 15, 2013 of the remaining 18,750 shares of the Preferred Stock held by unrelated third parties. The repurchase and redemption of the Preferred Stock included the payment of all preferred dividends in arrears totaling $5.1 million.

As of September 30, 2013, IBC remained subject to a written agreement with the FRB and the restrictions contained therein, including the requirement for IBC to obtain regulatory approval to accept dividend payments from INB. IBC has been informed by the FRB that it is reviewing the need for such agreement and IBC has advised the FRB that, in IBC’s view, it has complied with the requirements of the agreement. As a result of being subject to this agreement as of September 30, 2013, IBC exercised its right under the indentures for its trust preferred securities to again defer interest payments on that outstanding debt. The regularly scheduled interest payments on IBC’s debt continue to be accrued and are recorded as interest expense in our financial statements. Accrued interest payable on IBC’s debt at September 30, 2013 amounted to $0.5 million. The interest payments can only resume at such time as IBC is permitted to resume payment by its regulator.

At September 30, 2013, IBC had cash and short-term investments totaling $2.7 million, of which $2.4 million was available for use (inclusive of $1.3 million of cash on deposit with INB).

As discussed in note 15 to the financial statements in this report, IBC’s regulatory capital ratios at September 30, 2013 well exceeded its current minimum requirements and it does not expect to need additional capital over the next twelve months. IBC relies on cash dividends received from INB to fund interest payments due on IBC’s outstanding debt as well as for IBC’s payment of cash dividends on its capital stock, if and when declared.

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Summary

We consider our current liquidity and sources of funds sufficient to satisfy our outstanding lending commitments and maturing liabilities.

We are not aware of any trends, known demands, commitments or uncertainties other than those discussed above in this section or elsewhere in this report that are expected to have a material impact on our future operating results, liquidity or capital resources. However, there can be no assurances that adverse conditions will not arise in the credit and capital markets or from the restrictions placed or that may be placed on us by our regulators (currently those with respect to IBC’s payment of cash dividends and interest on its debt obligations and the incurrence of new debt) that would adversely impact our liquidity and ability to raise funds to meet our operations and satisfy our outstanding lending commitments and maturing liabilities or raise new working capital if needed.

Additional information concerning investment securities, deposits, borrowings and preferred stock, including interest rates, dividends and maturity dates thereon, can be found in notes 2, 6, 7, 8, and 9 to the financial statements in this report.

Contractual Obligations

The table below summarizes our contractual obligations as of September 30, 2013 due within the periods shown.

			Amounts Due Within
($ in thousands)	Total		Oct 1 to Dec 31, 2013		2014 and 2015		2016 and 2017		2018 and Later
Deposits with stated maturities		$   897,412		$186,472		$436,919		$209,929		$64,092
Deposits with no stated maturities		400,991		400,991		-		-		-
Subordinated debentures - capital securities		56,702		-		-		-		56,702
Mortgage escrow payable and official checks outstanding		32,227		32,227		-		-		-
Unfunded loan commitments and lines of credit (1)		31,349		31,349		-		-		-
Operating lease payments		16,297		364		3,102		3,010		9,821
Accrued interest payable on deposits		1,398		1,398		-		-		-
Accrued interest payable on all borrowed funds		463		463		-		-		-
Death benefit payments		240		66		174		-		-
		$1,437,079		$653,330		$440,195		$212,939		$130,615

(1) Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.

Regulatory Capital and Other Matters

See the section “Supervision and Regulation” in Item 1 “Business” in our 2012 10-K and note 19 to the financial statements in our 2012 10-K, and as updated by note 15 to the financial statements in this report.

Asset and Liability Management

We have interest rate risk that arises from differences in the repricing of our interest-earning assets and interest-bearing liabilities within a given time period. The primary objective of our asset/liability management strategy is to limit, within established board approved policy guidelines, the adverse effect of changes in interest rates on our net interest income and capital. We have never engaged in trading or hedging activities, nor invested in interest rate derivatives or entered into interest rate swaps. INB, whose assets represent 99% of our consolidated assets, engages an outside consultant to prepare quarterly reports using an earnings simulation model to quantify the effects of various interest rate scenarios on its projected net interest and dividend income over projected periods. These computations begin with our gap analysis that is adjusted for additional assumptions regarding balance sheet growth and composition, and the pricing and re-pricing and maturity characteristics of INB’s assets and liabilities.

Gap analysis measures the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a given time period. For a further discussion of gap analysis, including the factors that affect its computation and results, see pages 67 through 69 of our 2012 10-K.

As noted in the footnotes to the gap table below, there are numerous assumptions that are made by us to compute the gap. A change in any of these assumptions would materially alter the results of the gap analysis as well as the simulation model.

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As discussed in our 2012 10-K and in this report, the amount of fixed-rate loans in our loan portfolio has increased over the last several years and such loans constitute approximately 95%, or $1.05 billion, of the loan portfolio at September 30, 2013. We also have loans (approximately 4% or $41 million) in the portfolio that have terms that call for predetermined increases in the interest rate at various times over the life of the loan. Included in our fixed-rate loans above is approximately $90 million of loans (originated mostly since the beginning of 2012) whereby the borrower has the option prior to maturity and with the payment of a specified fee, to extend the loan for a new term at an interest rate per annum equal to the greater of the old rate or a new rate based on a fixed spread (ranging from 250 to 300 basis points) over a specified index, subject to meeting our underwriting requirements. The future repricing of our loans that have predetermined rate increases or the aforementioned options may not be at the same magnitude as general changes in market rates. Our entire loan portfolio had a short weighted-average life of approximately 4.5 years at September 30, 2013.

The table below summarizes our interest-earning assets and interest-bearing liabilities as of September 30, 2013, scheduled to mature or reprice within the periods shown.

($ in thousands)	0-3 Months		4-12 Months		Over 1-5 Years			Over 5 Years		Total
Loans (1)		$   36,231		$112,030		$649,383			$266,939		$1,064,583
Loans - performing nonaccrual TDRs (1)		2,283		33,485		-			-		35,768
Securities held to maturity (2)		226,185		61,191		118,491			7,850		413,717
Securities available for sale (2)		1,016		-		-			-		1,016
Short-term investments		4,961		-		-			-		4,961
FRB and FHLB stock		2,360		-		-			5,877		8,237
Interest-earning time deposits with banks		-		1,150		4,220			-		5,370
Total rate-sensitive assets		$ 273,036		$207,856		$772,094			$280,666		$1,533,652
Deposit accounts (3):
Interest checking		$   15,816		$            -		$            -			$            -		$     15,816
Savings		9,670		-		-			-		9,670
Money market		370,367		-		-			-		370,367
Certificates of deposit		186,472		247,583		449,783			13,574		897,412
Total deposits		582,325		247,583		449,783			13,574		1,293,265
Debentures (1)		56,702		-		-			-		56,702
Accrued interest on all borrowed funds (1)		463		-		-			-		463
Total borrowed funds		57,165		-		-			-		57,165
Total rate-sensitive liabilities		$ 639,490		$  247,583		$449,783			$  13,574		$1,350,430
GAP (repricing differences)		$(366,454)		$   (39,727)		$322,311			$267,092		$   183,222
Cumulative GAP		$(366,454)		$ (406,181)		$ (83,870	)		$183,222		$   183,222
Cumulative GAP to total assets		(23.1)%		(25.6)%		(5.3)%			11.6%		11.6%

Significant assumptions used in preparing the preceding gap table follow:

(1)  Floating-rate loans, loans with predetermined rate increases and floating-rate borrowings are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which they mature. Fixed-rate loans, including those with options to extend are scheduled according to their contractual maturities. Deferred loan fees and the effect of possible loan prepayments are excluded from the analysis. Nonaccrual loans of $3.7 million are also excluded from the table.

(2)  Securities are scheduled according to the earlier of their next callable date or the date on which the interest rate is scheduled to change. A large number of the securities have predetermined interest rate increases or “steps up” to a specified rate on one or more predetermined dates. Generally, the security becomes eligible for redemption by the issuer at the date of the first scheduled step-up. The net carrying value (or $2.6 million) of corporate securities that are on a cash basis of accounting are excluded from the table.

(3)  Interest checking, savings and money market deposits are regarded as 100% readily accessible withdrawable accounts and certificates of deposit are scheduled according to their contractual maturity dates. This assumption contributes significantly to the liability sensitive position reported per the one-year gap analysis. However, if such deposits were treated differently, the one-year gap would then change accordingly. It should be noted that depositors may not necessarily immediately withdraw funds in the event deposit rates offered by INB did not change as quickly and uniformly as changes in general market rates.

At September 30, 2013, the gap analysis above indicated that our interest-bearing liabilities that were scheduled to mature or reprice within one year exceeded our interest-earning assets that were scheduled to mature or reprice within one year. This one-year interest rate sensitivity gap amounted to a negative $406 million, or a negative 25.6% of total assets, at September 30, 2013. As a result of the negative one-year gap, the composition of our balance sheet at September 30, 2013 was considered “liability-sensitive,” indicating that our interest-bearing liabilities would generally reprice with changes in interest rates more rapidly than our interest-earning assets.

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The table that follows summarizes the results of certain scenarios of our earnings simulation model as of September 30, 2013. The model takes into account our gap analysis as further adjusted by additional assumptions, including deposit decay factors for both rate and non-rate sensitive deposits. Furthermore, in determining the assumed rates offered on our deposit accounts in the model, we use internally developed beta factors that utilize historical data based on a specific time frames for both rising and declining interest rate environments.

		Rate Shock Scenario
($ in thousands)	Base Net interest and Dividend Income	100 Basis Point Decrease (1)	200 Basis Point Increase (1)	300 Basis Point Increase (2)
Next 12 months	$40,101	$39,685	$38,314	$33,196
% change		-1.04%	-4.46%	-17.22%
Next 13-24 months	$41,251	$38,115	$38,191	$35,532
% change		-7.60%	-7.42%	-13.86%
2 Year Cumulative	$81,352	$77,800	$76,505	$68,728
% change		-4.37%	-5.96%	-15.52%

(1)  The model for this scenario covers a 24 month horizon and assumes interest rate changes are gradually ramped up or down over a 12 month horizon using various assumptions based upon a parallel yield curve shift and are subsequently sustained at those levels for the remainder of the simulation horizon.

(2)  The model for this scenario utilizes an instantaneous parallel rate shock and is maintained at those levels for the entire simulation horizon.

A sudden and substantial change in interest rates may adversely impact our net interest and dividend income to a larger extent than noted above if interest rates on our assets and liabilities do not change at the same speed, to the same extent, or on the same basis, as those assumed in the model.

Recent Accounting Standards

See note 1 to the financial statements in this report for a discussion of this topic.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and interest rates. Our market risk arises primarily from interest rate risk inherent in our lending, security investing, deposit-taking and borrowing activities. We do not engage in and accordingly have no direct risk related to trading accounts, commodities, interest rate hedges or foreign exchange. The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on-and off-balance sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in note 16 to the financial statements in this report. We also actively monitor and manage our interest rate risk exposure as discussed in Item 2 above under the caption “Asset and Liability Management.”

ITEM 4. Controls and Procedures

Our management evaluated, with the participation of our Principal Executive and Financial Officers, the effectiveness of the design and operation of our company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Principal Executive and Financial Officers have concluded that as of September 30, 2013, our disclosure controls and procedures were effective. There has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We are periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as foreclosure proceedings. Based on review and consultation with legal counsel, management does not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, financial position or liquidity.

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ITEM 1A. Risk Factors

This item requires disclosure of any new or material changes to our risk factors disclosed in our 2012 10-K, where such factors are discussed on pages 28 through 36. There were no material changes to the risk factors during the quarter ended September 30, 2013, other than the following. We are updating certain risk factor disclosure set out in our 2012 10-K regarding our loan portfolio to discuss the most recent trends in the composition of that portfolio, as discussed elsewhere in this report. The risks described below and in our 2012 10-K are not the only risks facing our company. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

Our loan portfolio is concentrated in loans secured by commercial and multi-family real estate, which increases the risk associated with our loan portfolio.

Our loan portfolio is concentrated in loans secured by commercial and multi-family real estate. This type of concentration increases the risk associated with our loan portfolio because such loans are generally considered riskier than many other kinds of loans, like single family residential real estate loans, since these loans tend to involve larger loan balances to one borrower or groups of related borrowers, and repayment of such loans is typically dependent upon the successful operation of the underlying real estate. Additionally, in our portfolio we have some loans secured by vacant or substantially vacant properties as well as some vacant land, all of which typically do not have adequate or any income streams and depend upon other sources of cash flow from the borrower for repayment. In many of these cases, a special escrow account is held by us for the life of the loan.

Over the past several years, due to increased liquidity in the banking system and widespread increasing competition for real estate loans, particularly multifamily loans in the New York City metropolitan area, the effective loan rates for multifamily (as well as commercial real estate loans to a large extent) have been driven down substantially from historical levels, with interest rates offered as low as 3% or below for 5 to 10 year multifamily balloon products, with a portion being interest only loans. In addition to this aggressive pricing by our competitors, government agency programs have increased the attractiveness of these loans and have further fueled interest rate and term competition. Further, lower interest rates have driven up the size of these loans in relation to the value of the underlying collateral. We have also seen a shift in recent years of rental properties being converted to condominium or cooperative status which takes them out of the normal multifamily market. All of these conditions have reduced what we believe to be suitable lending opportunities for us during the past few years, particularly in the multifamily real estate market. As disclosed in our 2012 10-K, our two senior lending officers, our Chairman and INB’s President, both of whom have substantial experience in commercial and multifamily real estate lending, with oversight from INB’s Board of Directors and its Loan Committee, determine which lending opportunities are suitable for us, including setting interest rates, fees charged and maturity terms of our real estate loans. All new loans in excess of $250,000 must be first reviewed and approved by INB’s Loan Committee, which is comprised of three members of INB’s Board of Directors, one of whom is also our Chairman.

The market conditions described above have resulted in a large number of the loans we originated prior to 2010 being repaid through refinancing by other institutions. Our new loan originations, moreover, have been more weighted towards commercial real estate loans, with an emphasis on mixed-use properties and retail strip centers in the New York City metropolitan area. We have increased our lending over the last two years on loans to investors that are secured by blocks of 1-4 family individual condominium dwelling units due to attractive collateral values and yields in this market, particularly in our Florida market. We normally make these loans to investors who purchase multiple condo units that remain unsold after a condo conversion or the unsold units in a new condo development. The units are normally rented for a number of years until the economy improves and the units can be sold as originally intended. Although these loans are classified necessarily as 1-4 family as required by regulatory guidance, they are underwritten by us in accordance with our multifamily underwriting polices and their risk characteristics are essentially the same as our multifamily real estate lending. We also risk weight these loans for regulatory capital purposes at 100%. At September 30, 2013, such loans accounted for approximately 6% of our total loan portfolio compared to less than 1% at the end of 2010.

We have also increased our lending over the last two years in the single tenant non-credit and credit sectors of the commercial real estate market likewise due to attractive yields. This includes loans on real estate leased to national and regional chains of specialty restaurants, fast food establishments, retailers, drug stores and convenience stores, bank branches and some single occupancy office buildings, with a large portion of the new loans originated in states other than New York and Florida, including geographical areas that are considered secondary and tertiary markets.

A significant portion of the loans secured by restaurants (which totaled approximately $42 million at September 30, 2013) are guaranteed by the franchisees that operate the business and not by the franchisor. At September 30, 2013, single tenant non-credit loans accounted for approximately 11% of our total loan portfolio, compared to approximately 2% at the end of 2010. Nearly all of the single tenants have triple net leases, whereby the tenant also pays all of the utilities, property taxes and insurance directly to the appropriate vendors and municipalities.

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Loans with single-tenant exposure may have greater risk of default than loans on buildings with large, diversified tenant rosters. Moreover, some of the single tenant loans in our portfolio have leases that expire before the loan matures which further increases the credit risk of these loans, although in many cases, these loans have accelerated principal amortization schedules and the leases contain renewal options. In such situations, there is always the risk that the tenant will not renew upon lease maturity, which may result in a significant amount of time and expense involved with replacing a major tenant if it were to vacate, default on its payments or we were to acquire the property through foreclosure. Furthermore, tenants that are not rated or are rated “non-credit” (non-credit defined as tenants with a debt rating from the major rating agencies, such as Standard and Poor’s, that is below investment grade or “BBB” for example) also pose a greater risk of default as compared to “credit rated tenants.”

The trends described above has caused our total commercial real estate loans as a percentage of our total loans to increase from 63% at the end of 2008 to 74% at September 30, 2013, while our multifamily loans, inclusive of loans on investor owned condominiums, as a percentage of total loans has decreased from 35% to 25% during the same time frame. The average yield on our entire loan portfolio has also declined from a weighted-average of 6.48% in 2008 to 5.35% in the most recent quarter ended September 30, 2013, reflecting lower market interest rates and highly competitive conditions.

Additionally, during the same time frame, as a result of competitive market conditions, lower pricing in originating loans and borrower preference for fixed-rate product, we have originated nearly all fixed-rate loans with somewhat longer maturities. Loans with fixed interest rates constituted approximately 95% of the loan portfolio at September 30, 2013. The portfolio also included loans (approximately 4% of the portfolio) that have terms that call for predetermined interest rate increases over the life of the loan, which may or may not be the same as future changes in market interest rates. Our entire loan portfolio had a weighted-average remaining life of approximately 4.5 years as of September 30, 2013, compared with 3.0 years at December 31, 2008. See the section “Asset and Liability Management” in this report as well as our 2012 10-K for a further discussion of our fixed-rate loans and their impact on our interest rate risk.

We cannot predict how long the trends or factors noted above will continue or how they will impact our loan origination volumes, loan types and loan terms over the long term. For a further discussion of the risks associated with commercial and multifamily real estate lending, see our 2012-10-K beginning on page 5.

All of our commercial and multi-family real estate loans require ongoing evaluation and monitoring since they may be affected to a greater degree by adverse conditions in the real estate markets or the economy or changes in government regulation. A number of our borrowers also have more than one mortgage loan outstanding with us. Likewise, a number of these borrowers may also own other properties that are encumbered by separate mortgages from other lenders. Consequently, an adverse development with respect to the borrower may expose us to a greater risk of loss with respect to our otherwise performing loans with the same borrower. Furthermore, banking regulators continue to give commercial real estate lending greater scrutiny and banks with higher levels of these loans are expected to implement improved underwriting and risk management policies and portfolio stress testing, as well as maintain higher levels of allowances for possible losses and capital levels as a result of commercial real estate lending growth and exposures.

Regardless of the underwriting criteria we utilize, we may experience lending losses as a result of various factors beyond our control, including, among other things, changes in market and economic conditions affecting the value of our loan collateral and problems affecting the credit and business of our borrowers. Our ability to recover our investment in the mortgage loans we originate is ultimately dependent on the market value of the properties collateralizing such loans because many of the loans permit no recourse or limited recourse against the property’s owner.

Even with personal recourse, successful collection is still difficult to achieve. In addition, our losses in connection with delinquent and foreclosed loans may be more pronounced because our commercial and multifamily real estate mortgage loans generally have amortization schedules common to the banking industry thus resulting in limited principal reduction during the life of the loan and consequently a substantial part of the loan’s original principal amount is due at maturity. All of the above factors could adversely affect our operating results and financial condition.

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ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

ITEM 3.  Defaults Upon Senior Securities

As a result of IBC being subject to restrictions (arising from IBC’s Formal Agreement with its primary regulator, the FRB) with respect to the payment of interest on its debt, IBC elected to defer regularly scheduled interest payments on its $55 million of outstanding debt (TRUPs) effective with scheduled interest payments due in the third quarter of 2013. The deferral of interest payments is permitted by the underlying indentures governing this debt and does not constitute a default. During the deferral period, interest expense will continue to accrue for financial statement purposes at the stated coupon rate, including accruals on the deferred and unpaid interest. At September 30, 2013, IBC had accrued a total of $0.5 million of interest payments on its outstanding debt.

ITEM 4.  Mine Safety Disclosures

Not Applicable

ITEM 5.  Other Information

Not Applicable

ITEM 6.  Exhibits

The information called for by this item is incorporated by reference to the Exhibit Index included in this Quarterly Report on Form 10-Q, immediately following the signature page.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INTERVEST BANCSHARES CORPORATION
	(Registrant)
Date: November 5, 2013	By: /s/ Lowell S. Dansker
	Lowell S. Dansker, Chairman and Chief Executive Officer
	(Principal Executive Officer)
Date: November 5, 2013	By: /s/ John J. Arvonio
	John J. Arvonio, Chief Financial and Accounting Officer
	(Principal Financial Officer)

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Intervest Bancshares Corporation and Subsidiary

Exhibit Index

The following exhibits are filed as part of this report.

Exhibit #                                                                                   Exhibit Description
31.0	Certification of the principal executive officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.1	Certification of the principal financial officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.0	Certification of the principal executive and financial officers pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
101.0	The following materials from Intervest Bancshares Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Earnings; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) related financial statement footnotes.

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